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 $130,000. 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 $9,400, including installation. After five years, the machine could be sold for $5,000. The company estimates that the cost to operate the machine will be $7,400 per year. The present method of dipping chocolates costs $34,000 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 $1.05 per box. A 1 1 % rate of return is required on all investments. Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using tables. Required: 1. What are the annual net cash inflows that will be provided by the new dipping machine? 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 cash inflows

Explanation / Answer

The Sweetwater Candy Company All Amounts in $ 1. Annual Cash Inflows provided by the New Dipping Machine Reduction in Annual Operating Costs Operating Costs, Present hand method 34000 Operating Costs, New Machine 7400 Annual Savings in Operating Costs 26600 Increased Annual Contribution Margin 6300 Total Annual Net Cash Inflows 32900 2. The Net Present Value of the new project is based on the following data : Machine Costs 130000 Replacement Costs for year 3 9400 Sale Value at the end of year 5 5000 Annual Cash Inflow as above 32900 Rate of Return on Investment 11% From the above information, the Net Present Value of the new dipping machine works out to -$ 32,181.19

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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