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?
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| Reduction
in annual operating costs: |
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| Operating
costs, present hand method |
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| Operating
costs, new machine |
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| Annual
savings in operating costs |
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| Increased
annual contribution margin |
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| Total annual net cash inflows |
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| 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.)
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Now |
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| Purchase of machine |
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| Annual net cash inflows |
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Replacement parts |
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| Salvage
value of machine |
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| Total cash flows |
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| Net present value |
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