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 $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 $11,000, including installation. After five years, the machine could be sold for $7,000. The company estimates that the cost to operate the machine will be $9,000 per year. The present method of dipping chocolates costs $50,000 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 $1.50 per box. A 18% rate of return is required on all investments.

Explanation / Answer

Now 1 2 3 4 5 Purchase of machine (180,000) Annual net cash inflows 50,000 50,000 50,000 50,000 50,000 Replacement parts (11,000) Salvage value of machine 7,000 Total cash flows (180,000) 50,000 50,000 39,000 50,000 57,000 Discount factor at 18% 1.000 0.847 0.718 0.609 0.516 0.437 Present value (180,000) 42,350 35,900 23,751 25,800 24,909 Net present value (27,290)

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.