Question

Charlie Corporation is considering buying a new donut maker. This machine will replace an old donut maker that still has a useful life of 6 years. The new machine will cost $3,780 a year to operate, as opposed to the old machine, which costs $4,250 per year to operate. Also, because of increased capacity, an additional 21,800 donuts a year can be produced. The company makes a contribution margin of $0.10 per donut. The old machine can be sold for $8,800 and the new machine costs $31,800. The incremental annual net cash inflows provided by the new machine would be (Ignore income taxes.):

$2,650

$470

$2,180

$6,620

Answer 1

Contribution Per Donut =	0.1
Additional donuts produced =	21800
Additional Contribution =	2180
Operating cost from new Machine =	3780
Operating cost from Old Machine =	4250
Net Saving in operating cost per year	470
Cost of new machine	31800
Less Resale value of old machine	8800
Cost of replacement =	23000
Incremental annual net cash inflows provided by new machine=
Additional Contribution + Saving in operating costs	2650
Answer- 2650
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