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 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.

 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

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