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Problem 11-14A 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 $82,000 new. It would last the bakery for fifteen years but would require a $6,000 overhaul at the end of the twelfth year. After fifteen years, the machine could be sold for $5,000.

The bakery estimates that it will cost $12,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $32,000 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 $0.50 per package. The bakery requires a 11% 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?

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, other intermediate calculations and final answer to the nearest whole dollar.)

Net present value

$

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