(Ignore income taxes in this problem.) 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:

Question

Quizplus · Accepted Answer

To determine the incremental annual net cash inflows provided by the new machine, we need to consider the following:

1. Operating expenses: The new machine will cost $3,500 a year to operate, while the old machine costs $3,900 per year to operate. This means that the new machine will save the company $400 per year in operating expenses.

2. Increased capacity: The new machine will allow the company to produce an additional 10,000 donuts a year. With a contribution margin of $0.15 per donut, this means that the company will earn an additional $1,500 per year in contribution margin.

3. Sale of the old machine: The company can sell the old machine for $6,000, which represents a cash inflow.

Using these three factors, we can calculate the incremental annual net cash inflows as follows:

Incremental annual net cash inflows = Savings in operating expenses + Increased contribution margin + Cash inflow from sale of old machine

Incremental annual net cash inflows = $400 + $1,500 + $6,000

Incremental annual net cash inflows = $7,900

Therefore, the incremental annual net cash inflows provided by the new machine is $7,900. Since this amount is greater than the cost of the new machine ($28,000), it would be beneficial for Baker Corporation to purchase the new donut maker.

The answer is option C ($1,900).

(Ignore Income Taxes in This Problem