(Ignore income taxes in this problem.) 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 4 years. In addition, this new machine would allow the production of one new type of bagel which 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 4 year useful life. Bugle's discount rate is 14%.
-The net present value of this investment is closest to:

Question

Quizplus · Accepted Answer

The net present value is the sum of the present values of all future cash flows. In this case, the future cash flows are $2,000 per year for 10 years. The present value of each cash flow is $2,000 * (1 - 1/(1 + 0.1)^10) / 0.1 = $1,120. Therefore, the net present value is $1,120 * 10 = $11,200.

(Ignore Income Taxes in This Problem