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 $92,000 new. It would last the bakery for ten years but would require a $8,500 overhaul at the end of the seventh year. After ten years, the machine could be sold for $7,500. The bakery estimates that it will cost $11,500 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 6,000 packages per year. The bakery realizes a contribution margin of $0.70 per package. The bakery requires a 13% return on all investments in equipment. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What are the annual net cash inflows that will be provided by the new machine? (Omit the "$" 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 $ Explanation: 1. The annual net cash inflows would be: Reduction in annual operating costs: Operating costs, present hand method $ 31,000 Operating costs, new machine 11,500 Annual savings in operating costs 19,500 Increased annual contribution margin: 6,000 packages × $0.70 per package 4,200 Total annual net cash inflows $ 23,700 2. Item Year(s) Amount of Cash Flows 13% Factor Present Value of Cash Flows Cost of the machine Now $ (92,000) 1.000 $ (92,000) Overhaul required 7 $ (8,500) 0.425 (3,613) Annual net cash inflows 1-10 $ 23,700 5.426 128,596 Salvage value 10 $ 7,500 0.295 2,212 Net present value $ 35,196

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 $92,000 new. It would last the bakery for ten years but would require a $8,500 overhaul at the end of the seventh year. After ten years, the machine could be sold for $7,500.

The bakery estimates that it will cost $11,500 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 6,000 packages per year. The bakery realizes a contribution margin of $0.70 per package. The bakery requires a 13% 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

$

Explanation: 1.

The annual net cash inflows would be:

Reduction in annual operating costs:
Operating costs, present hand method	$ 31,000
Operating costs, new machine	11,500
Annual savings in operating costs	19,500
Increased annual contribution margin:
6,000 packages × $0.70 per package	4,200
Total annual net cash inflows	$ 23,700

2.

Item	Year(s)	Amount of Cash Flows		13% Factor	Present Value of Cash Flows
Cost of the machine	Now	$	(92,000)	1.000	$ (92,000)
Overhaul required	7	$	(8,500)	0.425	(3,613)
Annual net cash inflows	1-10	$	23,700	5.426	128,596
Salvage value	10	$	7,500	0.295	2,212
Net present value					$ 35,196