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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 $97,000 new. It would last the bakery for twelve years but would require a $7,500 overhaul at the end of the ninth year. After twelve years, the machine could be sold for $6,000.
The bakery estimates that it will cost $16,500 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $36,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 5,000 packages per year. The bakery realizes a contribution margin of $0.40 per package. The bakery requires a 4% return on all investments in equipment. (Ignore income taxes.)
Click here to view Exhibit 11B-1 and Exhibit 11B-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?
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