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 dipping chocolates. The dipping operation is currently done largely by hand. The machine the company is considering costs $230,000. 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 $10,400. including installation. After five years, the machine could be sold for $7,500.The company estimates that the cost to operate the machine will be $8,400 per year. The present method of dipping chocolates costs $44,000 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 $1.55 per box. A 13% rate of return is required on all investments.

Explanation / Answer

1 Reduction in Annual Operating Cost Operating Cost, Present hand method     44,000 Operating Cost new machine       8,400 Annual Saving in operating Cost     35,600 Increased annual Contribution Margin       9,300 Total Annual Net Cash Inflow     44,900 Now 1 2 3 4 5 2 Purchase of machine -230000 Annual Net Cash Inflow 44900 44900 44900 44900 44900 Repalce ment Cost -10400 Salvage Value of machine 7500 Total Cash Flows -230000 44900 44900 34500 44900 52400 Discount factor13% 13% 13% 13% 13% 13% 13% Present Value -230,000     39,735    35,163    23,910 27,538 28,441 Net Present value    -75,213 Present Value Cash Flow*(1+Discount factor)^-t t - time

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