The Sweetwater Candy Company would like to buy a new machine that would automati
ID: 2375392 • Letter: T
Question
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 $81,000. The manufacturer estimates that the machine would be usable for eight years but would require the replacement of several key parts at the end of the fifth year. These parts would cost $6,600, including installation. After eight years, the machine could be sold for $6,100.
The company estimates that the cost to operate the machine will be $11,500 per year. The present method of dipping chocolates costs $48,000 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 $0.7 per box. A 9% rate of return is required on all investments. (Ignore income taxes.)
Annual net cash inflows- $39300
Compute the new machine's net present value. Use the incremental cost approach.
Net present value-$ ______________ round to nearest dollar
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 $81,000. The manufacturer estimates that the machine would be usable for eight years but would require the replacement of several key parts at the end of the fifth year. These parts would cost $6,600, including installation. After eight years, the machine could be sold for $6,100.
The company estimates that the cost to operate the machine will be $11,500 per year. The present method of dipping chocolates costs $48,000 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 $0.7 per box. A 9% rate of return is required on all investments. (Ignore income taxes.)
Annual net cash inflows- $39300
Compute the new machine's net present value. Use the incremental cost approach.
Net present value-$ ______________ round to nearest dollar
Explanation / Answer
First of all, like many of these accounting word problems, there is a lot of added information that you don't really need and it is put in just to confuse you. For instance, except for the 20% rate of return, you don't need the information in the second paragraph. They've already done the calculation for you.....ANNUAL NET CASH INFLOWS = 32,000. Now you just need to calculate the present value of each inflow and outflow of cash for each year, add them together, then subtract the beginning cost of $120,000. The cash inflows for each year are as follows.
For years 1-5 the inflows are 32,000 per year.
For the sixth year, you have to subtract 9,000 for replacement parts; so the inflow is 23,000
For years 7-11 the inflows are 32,000 per year
For year 12, you would add the salvage value of 7,500; so the inflow is 39,500.
Using a business calculator or Excel's NPV function, the net present value of the future cash flows is $139,882.03. Subtract the $120,000 initial cost, and your answer is $19,882.03
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