Bugle's Bagel Bakery is investigating the purchase of a new bagel-making machine. This machine would provide an annual operating cost savings of $3,650 for each of the next four years. In addition, this new machine would allow the production of one new type of bagel that would result in selling 1,500 dozen more bagels each year. The company earns a contribution margin of $0.90 on each dozen bagels sold. The purchase price of this machine is $13,450, and it will have a four-year useful life. Bugle's discount rate is 14%. (Ignore income taxes in this problem.)
-The net present value of this investment is closest to which of the following?

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by finding the present value of cash inflows and subtracting the initial investment. The annual cash inflow is $3,650 (cost savings) + $1,350 (1,500 dozen x $0.90) = $5,000. Using a 14% discount rate, the present value of these cash inflows over four years is approximately $14,570. Subtracting the initial investment of $13,450 gives an NPV of approximately $1,120.

Bugle's Bagel Bakery Is Investigating the Purchase of a New