Mr. Puffin's Muffins
Friday, October 7, 2022
Hi Mr. Puffin,
After extensive research and financial projection, I would strongly suggest that you buy the new
oven for $50,000. After this one-time expense of $50,000, you'll face an annual $4,000
maintenance expense, a single $6,000 recalibration expense, and eventually recoup $20,000
through the salvage value of the oven. Without accounting for the time value of money, it's an
investment of $96,000 (not including the $20,000 return). To determine if the oven would be
profitable, I've performed some calculations to determine the net present value of the oven.
I've discovered that selling chocolate chip muffins raises $17,280 per year, cranberry muffins
raise $16,200 per year, and blueberry muffins raise $$12,960 per year. We can confidently state
that chocolate chip muffins are the best option to sell, having the highest annual sales. The net
present value across 10 years of these sales is approximately $115,950. Now looking to
expenses (and taking into account the time value of money), you'll have the $50,000 as is,
$26,840 in maintenance expense across 10 years, $4,086 in recalibration expense during year 5,
and recouping $9,260 in salvage value. This gives a final net present value of the oven of
$44,284. Hence, the oven is a great investment to generate more profits across the next 10
years.
