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 $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 12B-1 and Exhibit 12B-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 Compute the new machine's net present value. (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.) Net present value $ 23,976 < Required 1 Required 2

Answer 1

1. annual cash flows

	Per year
savings of labor cost	$32,000
operating cost of new machine	$7,200
increase in contribution margin [4,000*$0.95]	$3,800
Annual net cash flow	$28,600[$32,000-7,200+$3,800]

2.NPV= pv of cash inflows-initial investment

Year	Cash flow[A]	PV factor [B] at 18%	Present value[A]*[B]
0	-$110,000	1	-$110,000
1-5	$28,600	3.12717	$89,437.062	Ast here is uniform cash flow, we shall use annuity factor
3	-$9,200	0.60863	-$5,599.396	Installation
5	$5,000	0.43711	$2,185.55	salvage
		NPV	-$23,977	rounding off to nearest whole dollar [$2,185.55+$89,437.062-$110,000-$5,599.396]

USE MINUS SIGN AS NPV IS NEGATIVE

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