Problem 13-21 Basic Net Present Value Analysis [LO1] Doughboy Bakery would like
ID: 2382157 • Letter: P
Question
Problem 13-21 Basic Net Present Value Analysis [LO1]
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 $87,000 new. It would last the bakery for nineteen years but would require a $8,500 overhaul at the end of the sixteenth year. After nineteen years, the machine could be sold for $7,000.
The bakery estimates that it will cost $15,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $35,500 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 6,000 packages per year. The bakery realizes a contribution margin of $0.90 per package. The bakery requires a 11% return on all investments in equipment. (Ignore income taxes.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
What are the annual net cash inflows that will be provided by the new machine? (Omit the "$" sign in your response.)
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.)
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 $87,000 new. It would last the bakery for nineteen years but would require a $8,500 overhaul at the end of the sixteenth year. After nineteen years, the machine could be sold for $7,000.
The bakery estimates that it will cost $15,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $35,500 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 6,000 packages per year. The bakery realizes a contribution margin of $0.90 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.
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 $87,000 new. It would last the bakery for nineteen years but would require a $8,500 overhaul at the end of the sixteenth year. After nineteen years, the machine could be sold for $7,000. The bakery estimates that it will cost $15,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $35,500 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 6,000 packages per year. The bakery realizes a contribution margin of $0.90 per package. The bakery requires a 11% return on all investments in equipment. (Ignore income taxes.) What are the annual net cash inflows that will be provided by the new machine? (Omit the "$" sign in your response.) 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.)Explanation / Answer
Hi,
Please find the answer as follows:
Part 1:
Annual Cash Inflows = Reduction in Operating Costs + Increase in Contribution because of Additional Packages = (35500 - 15000) + 6000*.90 = 25900
Answer for Part 1 = 25900
Part 2:
NPV = -87000 + 25900*PVIFA(11%, 19 Years) - 8500*PVIF(11%,16 Years) + 7000*PVIF(11%,19 Years)
NPV = -87000 + 25900*7.839 - 8500*.188 + 7000*.138 = 115398
Answer for Part 2 = 115398.
Thanks.