The Sweetwater Candy Company would like to buy a new machine that would automati
ID: 2472008 • 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 $250,000. 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 $10,600, including installation. After five years, the machine could be sold for $9,000.
The company estimates that the cost to operate the machine will be $8,600 per year. The present method of dipping chocolates costs $46,000 per year. In addition to reducing costs, the new machine will increase production by 8,000 boxes of chocolates per year. The company realizes a contribution margin of $1.65 per box. A 12% rate of return is required on all investments.
Reduction in annual operating costs:
Please show the steps and fill out the exact chart. I am having trouble doing the expanded version of each year versus the annuity type that doesn't list every year. Thank you!
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 $250,000. 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 $10,600, including installation. After five years, the machine could be sold for $9,000.
The company estimates that the cost to operate the machine will be $8,600 per year. The present method of dipping chocolates costs $46,000 per year. In addition to reducing costs, the new machine will increase production by 8,000 boxes of chocolates per year. The company realizes a contribution margin of $1.65 per box. A 12% rate of return is required on all investments.
Reduction in annual operating costs:
Operating costs, present hand method $___________ Operating costs, new machine $ Annual savings in operating costs $ Increased annual contribution margin $ Total annual net cah inflows $ Now 1 2 3 4 5 Purchase of machine $ $ $ $ $ $ Annual net cash inflows $ $ $ $ $ $ Replacement Parts $ $ $ $ $ $ Salvage value of machine $ $ $ $ $ $ Total cash flows $ $ $ $ $ $ Discount Factor (12%) Present Value $ $ $ $ $ $ Net Present value $ X X X X XPlease show the steps and fill out the exact chart. I am having trouble doing the expanded version of each year versus the annuity type that doesn't list every year. Thank you!
Explanation / Answer
1. The net annual cash inflows would be:
Reduction in annual operating costs:
Operating costs, present hand method............
$46,000
Operating costs, new machine........................
8,600
Annual savings in operating costs...................
54,600
Increased annual contribution margin:
8,000 boxes × $1.65 per box..........................
13,200
Total net annual cash inflows............................
$67,800
2.
Now
1
2
3
4
5
Purchase of machine
(250,000)
0
0
0
0
0
Annual net cash flows
0
67,800
67,800
67,800
67,800
67,800
Replacement parts
0
0
0
(10,600)
0
0
Salvage value of the machine
0
0
0
0
0
$9,000
Total cash flows
(250,000)
67,800
67,800
57,200
67,800
76,800
Discount factor (12%)
1
0.8929
0.7972
0.7118
0.6355
0.5674
Present value
(250,000)
$60,535.71
$54,049.75
$40,713.83
$43,088.13
$43,578.38
NPV
-$8,043.2
Reduction in annual operating costs:
Operating costs, present hand method............
$46,000
Operating costs, new machine........................
8,600
Annual savings in operating costs...................
54,600
Increased annual contribution margin:
8,000 boxes × $1.65 per box..........................
13,200
Total net annual cash inflows............................
$67,800
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.