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 $3,630 a year to operate, as opposed to the old machine, which costs $3,875 per year to operate. Also, because of increased capacity, an additional 20,300 donuts a year can be produced. The company makes a contribution margin of $0.10 per donut. The old machine can be sold for $7,300 and the new machine costs $30,300. The incremental annual net cash inflows provided by the new machine would be (Ignore income taxes.):

Multiple Choice

• $2,275

• $2,030

• $245

• $5,270

Answer 1

A. $2,275

Operating cost savings per year ($3,875 − $3,630)	$245
Additional contribution margin provided by the new donut maker ($0.10 × 20,300	$2,030
Incremental annual net cash inflows provided by new machine	$2,275