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 $260,000. 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 $10,700, including installation. After five years, the machine could be sold for $10,000. The company estimates that the cost to operate the machine will be $8,700 per year. The present method of dipping chocolates costs $47,000 per year. In addition to reducing costs, the new machine will increase production by 9,000 boxes of chocolates per year. The company realizes a contribution margin of $1.70 per box. A 16% 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
Reduction in annual operating costs:
Operating costs, present hand method	47000
Operating costs, new machine	8700
Annual savings in operating costs	38300
Increased annual contribution margin	15300	=9000*1.70
Total annual net cash inflows	53600
2
	Now	1	2	3	4	5
Purchase of machine	-260000
Annual net cash inflows		53600	53600	53600	53600	53600
Replacement of parts				-10700
Salvage value of the machine						10000
Total cash flows	-260000	53600	53600	42900	53600	63600
Discount factor (16%)	1	0.862	0.743	0.641	0.552	0.476
Present value	-260000	46203	39825	27499	29587	30274
Net present value	-86612