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 $170,000. 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 $10,900, including installation. After five years, the machine could be sold for $6,000. The company estimates that the cost to operate the machine will be $8,900 per year. The present method of dipping chocolates costs $49,000 per year. In addition to reducing costs, the new machine will ncrease production by 5,000 boxes of chocolates per year. The company realizes a contribution margin of $1.45 per box. A 18% rate of return is required on all investments Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. 1 What are the an Required 1. What are the annual net cash inflows that will be provided by the new dipping machine? that will be provided by the new dipping Reduction in annual operating costs Operating costs, present hand method Operating costs, new machine Annual savings in operating costs 0 Increased annual contribution margin Total annual net cash inflows 0

Explanation / Answer

ANNUAL NET CAH INFLOW-

Reduction in Annual Operating Cost-

Operating Cost, Present Hand method = $ 49000

Operating Cost, New Machine = $ 8900

Annual Savings in Operating Cost = $ 40100   

Increase in annual contribution

( 5000 X $ 1.45 ) = $ 7250

Total Annual Net Cashflows = $ 47350

  

NET PRESENT VALUE-

(+) 6000

Particulars NOW 1 2 3 4 5 PURCHASE OF MACHINE $ 170000 ANNUAL NET CASHINFLOWS 0 $ 47350   $ 47350   $ 47350   $ 47350   $ 47350 REPLACEMENT PARTS (-)10900 SALVAGE VALUE OF MACHINE

(+) 6000

$ 47350 $ 47350 $ 36450 $ 47350 $ 53350 Discount Factor @ 18% 1 0.847 0.718 0.609 0.516 0.437 P.V of Cashinflows $ (-) 170000 $ 40105 $ 33997 $ 22198 $ 24433 $ 23314 TOTAL P.V of Cashinflows $144047 - - - - - Net Present Value (-) $ 25953 - - - -    -

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