Question

The Sweetwater Candy Company would like to buy a new machine that would automatically “dip” chocolates. The dipping operation is currently done largely by hand. The machine the company is considering costs $210,000. The manufacturer estimates that the machine would be usable for five years but would require the replacement of several key parts at the end of the third year. These parts would cost $11,300, including installation. After five years, the machine could be sold for $6,000.

The company estimates that the cost to operate the machine will be $9,300 per year. The present method of dipping chocolates costs $53,000 per year. In addition to reducing costs, the new machine will increase production by 5,000 boxes of chocolates per year. The company realizes a contribution margin of $1.65 per box. A 19% rate of return is required on all investments.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. What are the annual net cash inflows that will be provided by the new dipping machine?

2. Compute the new machine’s net present value.

all 2 requirements

Answer 1

1
Reduction in annual operating costs:
Operating costs, present hand method	53000
Operating costs, new machine	9300
Annual savings in operating costs	43700
Increased annual contribution margin	8250	=5000*1.65
Total annual net cash inflows	51950
2
	Year(s)	Amount of Cash Flows	PV factor	Present Value of Cash Flows
Cost of the machine	Now	-210000	1	-210000
Replacement of parts	3	-11300	0.593	-6701
Annual net cash inflows	1-5	51950	3.058	158863
Salvage value of the machine	5	6000	0.419	2514
Net present value				-55324