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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 $90,000. The manufacturer estimates that the machine would be usable for eight years but would require the replacement of several key parts at the end of the fifth year. These parts would cost $8,000, including installation. After eight years, the machine could be sold for $6,100.


The company estimates that the cost to operate the machine will be $7,000 per year. The present method of dipping chocolates costs $33,000 per year. In addition to reducing costs, the new machine will increase production by 4,400 boxes of chocolates per year. The company realizes a contribution margin of $0.4 per box. A 15% rate of return is required on all investments. (Ignore income taxes.)


To determine the appropriate discount factor(s) using tables, click here to view Exhibit 12B-1 and Exhibit 12B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.





1.value:
10 points Requirement 1:
What are the annual net cash inflows that will be provided by the new dipping machine? (Omit the "$" sign in your response.)


Annual net cash inflows $






2.value:
10 points Requirement 2:
Compute the new machine's net present value. Use the incremental cost approach. (Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)


Net present value $

Explanation / Answer

1. The net annual cash flows would be: Reduction in annual operating costs: Operating costs, present hand method $33,000 Operating costs, new machine 7,000 Annual savings in operating costs 26,000 Increased annual contribution margin: 4,400 boxes × $0.4 per box 1,760 Total annual net cash inflows $27,760 2. Item Year(s) Amount of Cash Flows 15% Factor Present Value of Cash Flows Cost of the machine Now ($90,000) 1 ($90,000) Replacement of parts 5 ($8,000) 0.497 -3,976 Annual net cash inflows 12-Jan $27,760 5.421 150,487 Salvage value of the 8 $6,100 0.327         1,995 machine Net present value $   58,506 Reduction in annual operating costs: Operating costs, present hand method $33,000 Operating costs, new machine 7,000 Annual savings in operating costs 26,000 Increased annual contribution margin: 4,400 boxes × $0.4 per box 1,760 Total annual net cash inflows $27,760 2. Item Year(s) Amount of Cash Flows 15% Factor Present Value of Cash Flows Cost of the machine Now ($90,000) 1 ($90,000) Replacement of parts 5 ($8,000) 0.497 -3,976 Annual net cash inflows 12-Jan $27,760 5.421 150,487 Salvage value of the 8 $6,100 0.327         1,995 machine Net present value $   58,506 Reduction in annual operating costs: Operating costs, present hand method $33,000 Operating costs, new machine 7,000 Annual savings in operating costs 26,000

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