franklin bakery is considering buying a new doughnut making mach 256025

Franklin Bakery is considering buying a new doughnut-making machine. The cost of the machine is $10,000. The machine will last for 10 years and is expected to be worth $1,000 as scrap at that time. It is expected that the new machine will increase doughnut sales by 15,000 doughnuts per year. Each doughnut has a selling price of 50 cents. The annual operating costs of the doughnut machine are projected to be as follows. Note: These cost projections are based on the forecasted sales level of 15,000 doughnuts per year.

Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,250

Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200

Variable production overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,650

Variable selling costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900

Direct fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000

Indirect fixed costs* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000

* The indirect fixed costs represent the routine allocation of general company overhead to projects. Actually, because of the efficiency and reliability of the machine, general fixed company overhead will go down by $3,700 as a result of the purchase of the new doughnut-making machine. For simplicity, assume that all doughnut sales occur at the end of the year and that all costs are paid for in cash at the end of the year. Franklin Bakery has determined that the appropriate cost of capital to use in evaluating this doughnut machine is 16%.

Required:

1. With the numbers given, compute the net present value of the doughnut machine.

2. Assume that the appropriate cost of capital is 10% instead of 16%. Compute the net present value of the doughnut machine.

3. Assume again that the cost of capital is 16%. Now assume that the doughnut machine will increase production by 10,000 doughnuts per year instead of 15,000 doughnuts per year. This is within the relevant range. Compute the net present value of the doughnut machine.

4. Assume a cost of capital of 16% and an increase in production of 15,000 doughnuts per year. Now assume that the machine will cost $12,000 instead of $10,000 but that the machine will last 12 years instead of 10 years. The scrap value at the end of 12 years is still $1,000. Compute the net present value of the doughnut machine.