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 $110,000. 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 $9,200, 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 $7,200 per year. The present method of dipping chocolates costs $32,000 per year. In addition to reducing costs, the new machine will increase production by 4,000 boxes of chocolates per year. The company realizes a contribution margin of $0.95 per box. A 18% 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 inflows

Explanation / Answer

1.

Annual Net Cash inflows

2.

Net Present Value

* Kindly note that, as the discount factor tables was not provided, I used the factors till 4 decimal places. Depending upon that the final answer might vary (don't worry, it won't vary much. If I use 5 decimals then variation is $1).

Reduction in Annual Operating Costs: Operating costs, present hand method 32000 Operating costs, new machine 7200 Annual savings in operating costs 32000 - 7200 = 24800 Increased annual contribution margin 4000 * 0.95 = 3800 Total annual net cash inflows 24800 + 3800 = 28600

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