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 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)
Reduction in annual operating costs :
Operating costs, present hand method	$ 32,000
Less: Operating costs, new machine	($ 7,200)
Annual savings in operating costs	$ 24,800
Add: Increased annual contribution margin             ( 4,000 x $ 0.95 )	$ 3,800
Total Annual net cash inflows	$ 28,600

2)	Now	1	2	3	4	5
Purchase of machine	($ 110,000)
Annual net cash inflows		$ 28,600	$ 28,600	$ 28,600	$ 28,600	$ 28,600
Replacement parts				($ 9,200)
Salvage value of machine						$ 5,000
Total cash flows	($ 110,000)	$ 28,600	$ 28,600	$ 19,400	$ 28,600	$ 33,600
Discount factor @ 18%	1	0.847458	0.718184	0.608631	0.515789	0.437109
Present value	($ 110,000)	$ 24,237.30	$ 20,540.06	$ 11,807.44	$ 14,751.57	$ 14,686.86
Net present value	($ 23,976.77)
Answer may vary Subject to Factor values, I have taken Upto 6 decimals