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 59,400, 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 S7,400 per year. The present method of dipping chocolates costs 534,000 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 11% rate of return is required on all investments. Click here to view Exhibit 11B-1 and Exhibit 11B-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 infiows 2. Compute the new machine's net present value. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s) and final answers to the nearest whole dollar amount.) Now Purchase of machine Annual net cash inflows Salvage value of machine Total cash flows Discount factor (11%) Present value Net present value

Explanation / Answer

1 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 Now 1 2 3 4 5 Purchase of machine -130000 Annual net cash inflows 32900 32900 32900 32900 32900 Replacement parts -9400 Salvage value of machine 5000 Total cash flows -130000 32900 32900 23500 32900 37900 Discount factor 1 0.901 0.812 0.731 0.659 0.593 Present value -130000 29643 26715 17179 21681 22475 Net present value -12307

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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