The Sweetwater Candy Company would like to buy a new machine that would automati
ID: 2483918 • 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 $170,000. 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 $9,800, 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 $7,800 per year. The present method of dipping chocolates costs $38,000 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 $1.25 per box. A 16% 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 $170,000. 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 $9,800, 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 $7,800 per year. The present method of dipping chocolates costs $38,000 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 $1.25 per box. A 16% 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.
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 inflowsExplanation / Answer
Answer 1. Reduction in annual operating Costs: Operating cost, present hand method 38,000 Opearting costs, new machine 7,800 Annual savings in operating costs 30,200 Increased annual contribution margin (5000 Boxes X $1.25) 6,250 Total annual net cash inflows 36,450 Answer 2. Now 1 2 3 4 5 Purchase of Machine (170,000) - - - - - Annual net cash inflows - 36,450 36,450 36,450 36,450 36,450 Replacement parts - - - (9,800) - - Salage Value of Machine - - - - - 6,000 Total Cash Flow (170,000) 36,450 36,450 26,650 36,450 42,450 Discount Factor (16%) 1 0.8621 0.7432 0.6407 0.5523 0.4761 Present Value (170,000) 31,424 27,090 17,075 20,131 20,210 Net Present Value (54,070)
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