Question

Problem 10-1 Performing a Basic NPV Analysis (LO2 - CC8) 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 $145,000. 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 $9,800, including installation. After 12 years, the machine could be sold for about $7,250. The company estimates that the cost to operate the machine will be only $11,000 per year. The present method of dipping chocolates costs $46,000 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 $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. Required: 1. What are the net annual cash inflows that will be provided by the new dipping machine? Net annual cash inflows 2. Compute the new machine's net present value using the incremental cost approach. (Round discount factor(s) to 3 decimal places.) Net present value

Answer 1

Req 1
Annual cash inflows from New machine:
Additional contribution earned from new machine (4000 units @ 1.50)							6000
Add: savings in cost
Savings in manual dipping cost				46000
Less: Annual operating cost				11000
Net Ssavings in cost							35000
Annual cash inflows from New machine:							41000
Net Annual cash inflows:			41000
Req 2:
Net present Value:
Present value of cash inflows:
Present value of annual cash inflows($41000* Present Annuity factor i.e. 4.4392)								182007.2
Present value of salvage rea;ised at end of 12 years ($7250* PVf i.e. 0.1122)								813.45
Total present value of cash inflows									182821
Present value of cash outflows:
Initial Investment								145000
Present value of replacement cost ($ 9800*PVF of Year-3 i.e.0.3349)								3282.02
Total Present value of cash outflows									148282
					NET PRESENT VALUE				34539