The Sweetwater Candy Company would like to buy a new machine that would automati
ID: 2474138 • 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 $190,000. 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 $10,000, 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 $8,000 per year. The present method of dipping chocolates costs $40,000 per year. In addition to reducing costs, the new machine will increase production by 7,000 boxes of chocolates per year. The company realizes a contribution margin of $1.35 per box. A 13% 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.
What are the annual net cash inflows that will be provided by the new dipping machine?
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.)
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 $190,000. 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 $10,000, 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 $8,000 per year. The present method of dipping chocolates costs $40,000 per year. In addition to reducing costs, the new machine will increase production by 7,000 boxes of chocolates per year. The company realizes a contribution margin of $1.35 per box. A 13% 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.
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 0 Increased annual contribution margin Total annual net cash inflows $0 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.)
Now 1 2 3 4 5 Purchase of machine Annual net cash inflows Replacement parts Salvage value of machine Total cash flows $0 $0 $0 $0 $0 $0 Discount factor (13%) Present value 0 0 0 0 0 0 Net present value $0Explanation / Answer
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 8,000 Operating costs, new machine 40,000 Annual savings in operating costs 32,000 Increased annual contribution margin 9,450 7000*1.35 Total annual net cash inflows 41,450 Now 1 2 3 4 5 Purchase of machine (190,000.00) Annual net cash inflows 41,450.00 41,450.00 41,450.00 41,450.00 41,450.00 Replacement parts (10,000.00) Salvage value of machine 6,000.00 Total cash flows ($190,000) $41,450 $41,450 $31,450 $41,450 $47,450 Discount factor (13%) 1 0.8850 0.7831 0.6931 0.6133 0.5428 Present value -190000 36,681.178 32,461.402 21,796.423 25,422.031 25,753.957 Net present value ($47,885)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.