Data Problem 1 SWEETWATER CANDY COMPANY New machine cost $120,000 Life expectanc
ID: 2477510 • Letter: D
Question
Data Problem 1 SWEETWATER CANDY COMPANY New machine cost $120,000 Life expectancy in years 12 Overhaul costs in 6th year $9,000 Selling price after 12 years $7,500 Annual operating costs of machine $7,000 Annual operating costs of manual dipping $30,000 Increased box production from machine per year 6,000 Contribution margin per box $1.50 Required return on investment 20% 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 $120,000. The manufacturer estimates that the machine would be usable for 12 years but would require the replacement of several key parts at the end of the sixth year. These parts would cost $9,000, including installation. After 12 years, the machine could be sold for $7,500. The company estimates that the cost to operate the machine will be $7,000 per year. The present method of dipping chocolates cost $30,000 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 20% rate of return is required on all investments. Required: 1. What are the net annual cash inflows that will be provided by the new dipping machine? 2. Compute the new machine's net present value. Use the incremental cost approach and round all dollar amounts to the nearest whole dollar. Data Problem 1 SWEETWATER CANDY COMPANY New machine cost $120,000 Life expectancy in years 12 Overhaul costs in 6th year $9,000 Selling price after 12 years $7,500 Annual operating costs of machine $7,000 Annual operating costs of manual dipping $30,000 Increased box production from machine per year 6,000 Contribution margin per box $1.50 Required return on investment 20% 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 $120,000. The manufacturer estimates that the machine would be usable for 12 years but would require the replacement of several key parts at the end of the sixth year. These parts would cost $9,000, including installation. After 12 years, the machine could be sold for $7,500. The company estimates that the cost to operate the machine will be $7,000 per year. The present method of dipping chocolates cost $30,000 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 20% rate of return is required on all investments. Required: 1. What are the net annual cash inflows that will be provided by the new dipping machine? 2. Compute the new machine's net present value. Use the incremental cost approach and round all dollar amounts to the nearest whole dollar.Explanation / Answer
cash outflow cost of machines 120000 overhaul cost 9000 3014.082 total cash outflow 123014.1 operating cost at old machine operating cost of new machine saving additional sale saving in operating cost 30000 7000 23000 additonal unit of sale per unit contribution additional profit saving in operating cost Year total savings present value@20% present value of cash flow 6000 1.5 9000 23000 1 32000 0.833333 26666.67 2 32000 0.694444 22222.22 3 32000 0.578704 18518.52 4 32000 0.482253 15432.1 5 32000 0.401878 12860.08 6 32000 0.334898 10716.74 7 32000 0.279082 8930.613 8 32000 0.232568 7442.177 9 32000 0.193807 6201.814 10 32000 0.161506 5168.179 11 32000 0.134588 4306.816 12 32000 0.112157 3589.013 12 7500 0.112157 841.1749 sum of present value of cash flow 142896.1 cash outflow 123014.1 NPV 19882.03
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.