Question

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 $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.

Click here to view Exhibit 12B-1 and Exhibit 12B-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.

Answer #1

1 | ||||||

Reduction in annual operating costs: | ||||||

Operating costs, present hand method | 44000 | |||||

Operating costs, new machine | 8400 | |||||

Annual savings in operating costs | 35600 | |||||

Increased annual contribution margin | 9300 | =6000*1.55 | ||||

Total annual net cash inflows |
44900 |
|||||

2 | ||||||

Now | 1 | 2 | 3 | 4 | 5 | |

Purchase of machine | -230000 | |||||

Annual net cash inflows | 44900 | 44900 | 44900 | 44900 | 44900 | |

Replacement of parts | -10400 | |||||

Salvage value of the machine | 7500 | |||||

Total cash flows | -230000 | 44900 | 44900 | 34500 | 44900 | 52400 |

Discount factor (13%) | 1 | 0.885 | 0.783 | 0.693 | 0.613 | 0.543 |

Present value | -230000 | 39737 | 35157 | 23909 | 27524 | 28453 |

Net present value |
-75220 |

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 $10,400, including installation. After five
years, the machine could be sold for $7,500.
The company...

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...

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...

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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
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machine would be usable for five years but would require the
replacement of several key parts at the end of the third year.
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The company...

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 $240,000. 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 $10,500, including installation. After five
years, the machine could be sold for $8,000.
The company...

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...

A 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
$200,000. 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
$10,100, including installation. After five years, the machine
could be sold for $9,000.
The company estimates...

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...

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