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 $3,800 a year to operate, as opposed to the old machine, which costs $4,300 per year to operate. Also, because of increased capacity, an additional 22,000 donuts a year can be produced. The company makes a contribution margin of $0.10 per donut. The old machine can be sold for $9,000 and the new machine costs $32,000. The incremental annual net cash inflows provided by the new machine would be (Ignore income taxes.): Multiple Choice $2,700 $500 $2,200 $6,800

Answer 1

Answer:

$2,700

Explanation:

Data provided

New machine cost = $3,800

Old machine cost = $4,300

Additional donuts = 22,000

Contribution margin per unit = $0.10

The computation of Incremental annual net cash flows is as shown below:-

Incremental annual net cash flows = Operating cost saving per year + Additional contribution Margin provided by new donuts maker

= ($4,300 - $3,800) + (22,000 × $0.10)

= $500 + $2,200

= $2,700

Therefore for computing the incremental annual net cash flows we simply applied the above formula.