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 $3,600 a year to operate, as opposed to the old machine, which costs $3,800 per year to operate. Also, because of increased capacity, an additional 20,000 donuts a year can be produced. The company makes a contribution margin of $0.10 per donut. The old machine can be sold for $7,000 and the new machine costs $30,000. The incremental annual net cash inflows provided by the new machine would be (Ignore income taxes.):

In order to calculate The incremental annual net cash inflows provided by the new machine we would need to calculate first the Incremental annual contribution margin and the Annual operating cost savings as follows:

Incremental annual contribution margin= 20,000 * $0.10 =$2,000

Annual operating cost savings= $3,800 - $3,600=$200

The Incremental annual net cash inflows =Incremental annual contribution margin+Annual operating cost savings

Therefore, Incremental annual net cash inflows=$2,000 +$200

Incremental annual net cash inflows=$2,200

nikitavidya0 nikitavidya0 · Answer 2 · 2021-12-17T10:42:15+01:00

The incremental annual net cash inflows provided by the new machine would be $2200 when income tax is ignored.

The cost of the new machine is $3,600 having a useful life of 6 years. On the other hand, the cost of the old machine was $3,800. Thus, 20,000 more donuts could be produced now by having a contribution margin of $0.10 per donut.

The computation of incremental annual net cash inflows for the new machine would be:

[tex](20000*0.10)+(3800-3600)\\=2000+200\\=2200[/tex]

Here, the incremental annual contribution margin is added to annual operating cost saving by using the new machine, that is, $2200.

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