The Sweetwater Candy Company would like to buy a new machine that would automati
ID: 2568719 • 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 $240,000. 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 $10,500, including installation. After five years, the machine could be sold for $8,000.
The company estimates that the cost to operate the machine will be $8,500 per year. The present method of dipping chocolates costs $45,000 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 $1.60 per box. A 11% 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.
Complete this question by entering your answers in the tabs below.
Required 1
What are the annual net cash inflows that will be provided by the new dipping machine?
Required 2
Compute the new machine’s net present value. (Enter negative amount with a minus sign.)
Explanation / Answer
Req 1: Annual Cash Inflows: Savings in operating cost: Annual current operating cost 45000 Less: Annual oeprating cost after proposed installation of machine 8500 Savings in Operating cost 36500 Contribution earned on extra units produced(7000 boxes @1.60 per box) 11200 ANNUAL CASH INFLOWS 47700 Req 2: NPV Present value of cash inflows for 5 years (47700 for 5 years annuity 11%i.e. 3.696) 176299.2 Add: Present value of salvage realised at the end of 5th year (8000 at PV factor i.e. 0.593) 4744 Present value of cash inflows 181043.2 Less: Present value of initial investment 240,000 Less: Present value of cost of replacement($10,500 at the end of 3rd year i.e. PV factor of 0.731) 7675.5 Presetn value of cash outflows 247675.5 Net Present value -66632.3
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