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 \$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.

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 0 Increased annual contribution margin Total annual net cash inflows \$0
 Now 1 2 3 4 5 Purchase of machine Annual net cash inflows Replacement parts Salvage value of machine Total cash flows \$0 \$0 \$0 \$0 \$0 \$0 Discount factor (19%) Present value 0 0 0 0 0 0 Net present value \$0

 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 Now 1 2 3 4 5 Purchase of machine -210000 Annual net cash inflows 51950 51950 51950 51950 51950 Replacement parts -11300 Salvage value of machine 6000 Total cash flows (\$210,000) \$51,950 \$51,950 \$40,650 \$51,950 \$57,950 Discount factor (19%) 1 0.84 0.706 0.593 0.499 0.419 Present value (\$210,000) \$43,638 \$36,677 \$24,105 \$25,923 \$24,281 Net present value (\$55,376)

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