Use the incremental cost approach

Question

Doughboy Bakery would like to buy a new machine for putting icing and other toppings on pastries. These are now put on by hand. The machine that the bakery is considering costs $93,000 new. It would last the bakery for fifteen years but would require a $9,500 overhaul at the end of the twelfth year. After fifteen years, the machine could be sold for $8,000.

The bakery estimates that it will cost $12,500 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $32,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 7,000 packages per year. The bakery realizes a contribution margin of $0.80 per package. The bakery requires a 11% return on all investments in equipment. (Ignore income taxes.)

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:
1.	What are the annual net cash inflows that will be provided by the new machine? (Omit the "$" sign in your response.)

Annual net cash inflows

$

2.	Compute the new machine's net present value. Use the incremental cost approach. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Net present value

$