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 cost $160,000. The manufacturer estimates that the replacement of several key parts at the end of the third year. These parts would cost $9,700, including installation. After five years, the machine could be sold for $3,500. The company estimates that the cost to operate the machine will be $7,700 per year. The present method of dipping chocolates costs $37,000 per year. In addition to reducing costs, the new machine will increase production by 4,000 boxes of chocolates per year. The company realizes a contribution margin of $1.20 per box. A 12% rate of return is required on all investments. Compute the new machine's net present value.

Explanation / Answer

Cost of present method of dipping $      37,000 Less operating cost with the new maching $       (7,700) Total cost saved $      29,300 Additional contribution = 4000 x 1.2 $         4,800 Total cash flow $      34,100 0 1 2 3 4 5 Purchase of machine $        (160,000) Annual net cash inflow $             34,100 $             34,100 $      34,100 $             34,100 $             34,100 Replacement parts $       (9,700) Salvage Value $               3,500 Total Cash flow $         (160,000) $             34,100 $             34,100 $      24,400 $             34,100 $             37,600 Discount factor(12%) from PV Table 1.0000 0.8929 0.7972 0.7118 0.6355 0.5674 Present value $        (160,000) $             30,446 $             27,184 $      17,367 $             21,671 $             21,335 Net present value $          (41,995)

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