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 four years. In addition, this new machine would allow the production of one new type of bagel that 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 four-year useful life. Bugle's discount rate is 14%. (Ignore income taxes in this problem.)
- The net present value of this investment is closest to which of the following? (Do not round your intermediate calculations.)
A) $1,119.
B) $6,550.
C) $13,450.
D) $20,000.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows to their present value and subtracting the initial investment. The annual operating cost savings is $3,650, and the additional revenue from selling 1,500 dozen more bagels at $0.90 per dozen is $1,350 ($0.90 * 1,500). The total annual cash flow is $5,000 ($3,650 + $1,350). Using the discount rate of 14%, the present value of these cash flows over four years minus the initial investment of $13,450 gives an NPV closest to $1,119.

Bugle's Bagel Bakery Is Investigating the Purchase of a New