Question 7 (Capital budgeting) (10 Marks) Elina Svitolina recently won the Great Ukrainian Bake-Off. Following this success, she opened a patisserie in downtown Toronto which specialises in Danish Pastries. She thought she would be able to do all the work by hand, but the popularity of her store took her by surprise. The demand for her products has been incredible, and she is considering investing in some machinery to speed up the production process. In turn, this would allow her to use her time more efficiently. The machine will cost $75,000 to purchase and payment will be required up front and in full. It is expected to cost $5,000 in the first year to operate, and this will increase by 10% per annum thereafter. The supplier of the machine estimates the useful economic life of the machine to be 4 years. At the end of this period, the machine could be sold for $12,000. Therefore, Elina will need to record a depreciation charge of $15,750 per annum in her accounting books and records. Should the machine be acquired, Elina estimates that her patisserie will be able to sell approximately 12,000 additional cakes per year, at an average price of $5.50 per cake. The variable costs related to each cake are $3. The average selling price and operating costs per cake are expected to remain unchanged year-on-year. As a result of the acquisition of the machine, the patisserie will incur additional fixed costs amounting to $4,000 per year (i.e. excluding the machine running costs and depreciation), of which $1,500 relates to non-cash expenses. Elina requires a 10% return on all investments in equipment. All cash flows can be assumed to arise at the end of the year, unless stated otherwise. You can assume there are no taxation implications. Discount factor tables are provided at the end of the examination paper. Required Using net present value analysis, advise Elina whether she should buy the machine or not (note: present all workings to the nearest whole number). (10 marks)