Question

The Sweetwater Candy Company would like to buy a new machine that would automatically "dip” chocolates. The dipping operation currently is done largely by hand. The machine the company is considering costs $220,000. 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 $10,300, 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 $8,300 per year. The present method of dipping chocolates costs $43,000 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 $1.50 per box. A 15% 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 Required 2 What are the annual net cash inflows that will be provided by the new dipping machine? Total annual net cash inflows < Required 1 Required 2 >

Answer 1

1 2 3 5 0 $(220,000.00) $ (10,300.00) A 17 18 Years 19 Initial Investment 20 Machine Parts Costs 21 Sale of Asset 22 Increase in contribution Margin 23 Savings in Costs 24 Operation Cost 25 Net Annual Cash Flow 26 NPV 27 $ 7,500.00 $ $ 43,000.00 $ $ (8,300.00) $ $ 42,200.00 $ 7,500.00 $ 43,000.00 $ (8,300.00) $ 42,200.00 $ 7,500.00 $ 43,000.00 $ (8,300.00) $ 31,900.00 $ $ 7,500.00 $ 43,000.00 $ (8,300.00) $ 42,200.00 $ 6,000.00 7,500.00 43,000.00 (8,300.00) 48,200.00 $ (220,000.00 $ (82,328

F G =C18+1 -D18+1 =E18+1 =F18+1 -220000 А 17 18 Years 19 Initial Investment 20 Machine Parts Costs 21 Sale of Asset 22 Increase in contribution Margin 23 Savings in Costs 24 Operation Cost 25 Net Annual Cash Flow 26 NPV - 10300 6000 =5000*1.5 =5000*1.5 1=5000*1.5 =5000*1.5 =5000*1.5 43000 43000 43000 43000 43000 -8300 -8300 -8300 -8300 -8300 =SUM(C19:C24) =SUM(D19:D24) =SUM(E19:E24) =SUM(F19:F24) =SUM(G19:G24) =SUM(B19:B24) =NPV(0.15,C25:G25)+B25 27

1. Annual Cash Inflows = $42200

2. NPV = -$82328