Baker Corporation is considering buying a new donut maker. This machine will replace an old donut maker that still has a useful life of 4 years. The new machine will cost $3,500 a year to operate, as opposed to the old machine, which costs $3,900 per year to operate. Also, because of increased capacity, an additional 10,000 donuts a year can be produced. The company makes a contribution margin of $0.15 per donut. The old machine can be sold for $6,000 and the new machine costs $28,000. The incremental annual net cash inflows provided by the new machine would be:
A)$1,500
B)$400
C)$1,900
D)$7,000

Question

Quizplus · Accepted Answer

The incremental annual net cash inflows provided by the new machine can be calculated as follows:

Incremental revenue from additional 10,000 donuts = 10,000 x $0.15 = $1,500

Incremental annual cost savings from lower operating cost = $3,900 - $3,500 = $400

Incremental annual net cash inflows = $1,500 + $400 = $1,900

Therefore, the best choice is C, as the incremental annual net cash inflows from the new machine would be $1,900, which exceeds the cost of the old machine and the cost of the new machine over its useful life. Additionally, selling the old machine for $6,000 would further offset the cost of the new machine.

Baker Corporation Is Considering Buying a New Donut Maker