The Sweetwater Candy Company would like to buy a new machine that would automati
ID: 2450088 • Letter: T
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 $180,000. 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 $9,900, including installation. After five years, the machine could be sold for $5,000.
The company estimates that the cost to operate the machine will be $7,900 per year. The present method of dipping chocolates costs $39,000 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 $1.30 per box. A 15% rate of return is required on all investments.
Required:
1.What are the annual net cash inflows that will be provided by the new dipping machine? INSERTS NUMBERS IN BLANK SPOTS PLEASE
Operating costs, present hand method
Operating costs, new machine
Annual savings in operating costs
Increased annual contribution margin
Total annual net cash inflows
2.Compute the new machine’s net present value. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s) and final answers to the nearest whole dollar amount.)? INSERTS NUMBERS IN BLANK SPOTS PLEASE?
Reduction in annual operating costsOperating costs, present hand method
Operating costs, new machine
Annual savings in operating costs
Increased annual contribution margin
Total annual net cash inflows
Explanation / Answer
Solution :
1.annual net cash inflows that will be provided by the new dipping machine
Reduction in annual operating costs
Operating costs, present hand method
39000
Operating costs, new machine
7900
Annual savings in operating costs (39000-7900)
31100
Increased annual contribution margin (6000x1.3)
7800
Total annual net cash inflows (7800 + 31100)
38900
2.Computation the new machine’s net present value
now
1
2
3
4
5
Purchase of machine
-180000
annual net cash inflows
38900
38900
38900
38900
38900
replacement parts
-9900
salvage value of machine
5000
total cash flows
-180000
38900
38900
29000
38900
43900
discount factor @ 15%
1
0.869565
0.756144
0.657516
0.571753
0.497177
present value
-180000
33826.09
29413.99
19067.97
22241.2
21826.06
net present value
- 53,624.69
1.annual net cash inflows that will be provided by the new dipping machine
Reduction in annual operating costs
Operating costs, present hand method
39000
Operating costs, new machine
7900
Annual savings in operating costs (39000-7900)
31100
Increased annual contribution margin (6000x1.3)
7800
Total annual net cash inflows (7800 + 31100)
38900
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