Reference no: EM131921262

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 $78,000 new. It would last the bakery for ten years but would require a $9,000 overhaul at the end of the seventh year. After ten years, the machine could be sold for $8,000.

The bakery estimates that it will cost $18,500 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $38,000 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 $0.60 per package. The bakery requires a 8% return on all investments in equipment. (Ignore income taxes.)

Required:

1. What are the annual net cash inflows that will be provided by the new machine?

2. Compute the new machine's net present value. Use the incremental cost approach.