The Sweetwater Candy Company would like to buy a new machine that would automati

Question

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 $77,000. The manufacturer estimates that the machine would be usable for seven years but would require the replacement of several key parts at the end of the fifth year. These parts would cost $7,100, including installation. After seven years, the machine could be sold for $5,500.


The company estimates that the cost to operate the machine will be $5,500 per year. The present method of dipping chocolates costs $35,000 per year. In addition to reducing costs, the new machine will increase production by 4,900 boxes of chocolates per year. The company realizes a contribution margin of $0.4 per box. A 19% rate of return is required on all investments. (Ignore income taxes.)

Annual net cash inflows is $31460

Compute the new machine's net present value. Use the incremental cost approach.

$_____________________

Explanation / Answer

Net present value of the new machine: Present value of cash inflows 107,766 (7 years, at 19% rate = 3.4255) Residual value (7th year, 19% rate = 0.2991) 1,645.50 Present value of total cash inflows 109,412 Cost of the machine 77,000 Presen value of cash outflows (7 years, at 19% rate = 3.4255) 18,840 Other outflows (replacements) (5th year, 19% rate = 0.4261) 3,025 Present value of total cash outflows 98,865 Net present value 10,547 Present value of cash inflows 107,766 (7 years, at 19% rate = 3.4255) Residual value (7th year, 19% rate = 0.2991) 1,645.50 Present value of total cash inflows 109,412 Cost of the machine 77,000 Presen value of cash outflows (7 years, at 19% rate = 3.4255) 18,840 Other outflows (replacements) (5th year, 19% rate = 0.4261) 3,025 Present value of total cash outflows 98,865 Net present value 10,547 Present value of cash inflows 107,766 (7 years, at 19% rate = 3.4255) Residual value (7th year, 19% rate = 0.2991) 1,645.50 Present value of total cash inflows 109,412 Cost of the machine 77,000 Presen value of cash outflows (7 years, at 19% rate = 3.4255) 18,840 Other outflows (replacements) (5th year, 19% rate = 0.4261) 3,025 Present value of total cash outflows 98,865 Net present value 10,547

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