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 $210,000. 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 $11,300, 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 $9,300 per year. The present method of dipping chocolates costs $53,000 per year. In addition to reducing costs, the new machine will increase production by 5,000 boxes of chocolates per year. The company realizes a contribution margin of $1.65 per box. A 19% 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?

2. Compute the new machine’s net present value. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places and intermediate calculations to nearest dollar amount.)

Explanation / Answer

1)

Cost incurred under current method of dipping chocolates would be no longer required, leading to cost saving of 53000 per year

Further 5000 boxes will be produced in addition to current sale leading to increase in contribution of 8250 per year

In last year, i.e year 5 th salvage of machine will also realise 6000

Annual Net Cash flows year 1 -4 Saving in current dipping method cost 53000 Increase in contribution due to increased production 8250 = 5000 boxes x $ 1.65 Annual Net cash flows per year ( 1-4) 61250 Annual Net Cash flows year 5 Saving in current dipping method cost 53000 Increase in contribution due to increased production 8250 Residulal Value of Machine 6000 Annual Net cash flow for year 5 67250

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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