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Doughboy Bakery

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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 $81,000 new. It would last the bakery for nine years but would require a $6,000 overhaul at the end of the fifth year. After nine years, the machine could be sold for $4,000.

The bakery estimates that it will cost $11,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $31,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 2,000 packages per year. The bakery realizes a contribution margin of $0.40 per package. The bakery requires a 5% 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.

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Solution Summary

Your tutorial is attached in Excel. Since I didn't use book discount factors (rounded decimal amounts), the dollar amounts may be off just slightly. Excel does not round the factor computations.

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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