Question

The Sweetwater Candy Company would like to buy a new machine that would automatically “dip” chocolates....

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 $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 $10,400, including installation. After five years, the machine could be sold for $7,500. The company estimates that the cost to operate the machine will be $8,400 per year. The present method of dipping chocolates costs $44,000 per year. In addition to reducing costs, the new machine will increase production by 6,000 boxes of chocolates per year. The company realizes a contribution margin of $1.55 per box. A 13% rate of return is required on all investments. Use Excel or spreadsheet to solve. Round answers to the nearest dollar.

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

Reduction in annual operating costs:
Operating costs, present hand method
Operating costs, new machine
Annual savings in operating costs
Increased annual contribution margin
Total annual net cash inflows
2.

Compute the new machine’s net present value. (Any cash outflows should be indicated by a minus sign. Round final answers to the nearest whole dollar amount.)

Now 1 2 3 4 5
Purchase of machine
Annual net cash inflows
Replacement parts
Salvage value of machine
Total cash flows
Net present value

Homework Answers

Answer #1
Requirement -1
Reduction in annual operating costs:
Operating costs, present hand method $44,000
Operating costs, new machine $8,400
Annual savings in operating costs $35,600
Increased annual contribution margin
(6000 BoxX $1.55)
$9,300
Total annual net cash inflows $44,900
2. Computation of Net Present Value of new Machine
Year(s) Amount of Cash Flows PV factor Present Value of Cash Flows
Cost of the machine Now -$230,000         1.000 -$230,000
Replacement of parts 3 -$10,400         0.885 -$9,204
Annual net cash inflows 01-05 $44,900         3.517 $157,913
Salvage value of the machine 5 $7,500         0.543 $4,073
Net present value -$77,218
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