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 $90,000. 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 $5,400, including installation. After 12 years, the machine could be sold for about $4,500.

      The company estimates that the cost to operate the machine will be only $6,000 per year. The present method of dipping chocolates costs $26,000 per year. In addition to reducing costs, the new machine will increase production by 2,000 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.

Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables.

What are the net annual cash inflows that will be provided by the new dipping machine?

    

Compute the new machine's net present value using the incremental cost approach. (Round discount factor(s) to 3 decimal places.)

       

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 $90,000. 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 $5,400, including installation. After 12 years, the machine could be sold for about $4,500.

Explanation / Answer

Answer:

1)

The net annual cash flows would be:

2)

The net annual cash flows would be:

In$ Reduction in annual operating costs: Operating costs, present hand method 26000 Operating costs, new machine 6,000 Annual savings in operating costs 20,000 Increased annual contribution margin: 2000 boxes × $1.5 per box 3,000 Total annual net cash inflows 23,000

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