The Sweetwater Candy Company would like to buy a new machine that would automatically “dip” chocolates. The dipping operation currently is done largely by hand. The machine the company is considering costs $230,000. 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 $11,500, including installation. After five years, the machine could be sold for $8,000.
The company estimates that the cost to operate the machine will be $9,500 per year. The present method of dipping chocolates costs $55,000 per year. In addition to reducing costs, the new machine will increase production by 7,000 boxes of chocolates per year. The company realizes a contribution margin of $1.75 per box. A 13% rate of return is required on all investments.
Click here to view Exhibit 12B1 and Exhibit 12B2, 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.
Year 
0 
1 
2 
3 
4 
5 

cost of machine 
230000 

Saving from operating cost =550009500 
45500 
45500 
45500 
45500 
45500 

contribution margin from additional unit of sale =7000*1.75 
12250 
12250 
12250 
12250 
12250 

replacement of parts 
11500 

scrap value of machine 
8000 

net operating annual cash flow 
230000 
57750 
57750 
46250 
57750 
57750 

1 
present value of net operating cash flow = net operating cash flow/(1+r)^n r = 13% 
230000 
51106.1947 
45226.721 
32053.57001 
35419.15652 
31344.3863 
2 
Net present value = sum of present value of cash flow 
34849.9715 
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