Cost-Volume-Profit Analysis and Discounted Cash Flow The Susan Company wants to make doughnuts for its chain of restaurants in Los Angeles. Two machines are proposed for the production of the doughnuts: semiautomatic and automatic. The company now buys doughnuts from an outside supplier at $.14 each. Manufacturing costs would be:

SEMIAUTOMATIC AUTOMATIC Variable costs per doughnut $.12 $.1125 Fixed costs:

Annual cash operating outlays $2,500 $ 3,500 Initial cost of machines $6,000 $15,000 Useful life of machines in years 4 4 Salvage value at the end of 4 years — $ 3,000 The president wants to know how many doughnuts must be sold in order to have total average annual costs equal to outside purchase costs for the

(a) semiautomatic machine and

(b) automatic machine.
At what annual volume of doughnuts would the total annual costs be the same for both machines? Which machine is preferable if the volume exceeds the volume you computed? Why?
_ Assume that the sales forecast over the next four years is 400,000 doughnuts per year. The minimum desired rate of return is 10 percent. Should the automatic machine be purchased? Why? Show calculations. Ignore income taxes.
P.V. of $1.00 at 10% for 4 periods is lf P.V. of annuity of $1.00 at 10% for 4 periods is 3.2 Compare your answer with that in requirement 2. Do the answers differ?
How? Why?  L01