The Sweetwater Candy Company would like to buy a new machine that would automati

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 $93,000. The manufacturer estimates that the machine would be usable for nine years but would require the replacement of several key parts at the end of the second year. These parts would cost $7,800, including installation. After nine years, the machine could be sold for $6,300.


The company estimates that the cost to operate the machine will be $8,000 per year. The present method of dipping chocolates costs $41,000 per year. In addition to reducing costs, the new machine will increase production by 5,300 boxes of chocolates per year. The company realizes a contribution margin of $0.5 per box. A 17% rate of return is required on all investments. (Ignore income taxes.)


To determine the appropriate discount factor(s) using tables, click here to view Exhibit 12B-1 and Exhibit 12B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.


4.


Requirement 1:

What are the annual net cash inflows that will be provided by the new dipping machine? (Omit the "$" sign in your response.)

Explanation / Answer

1.         The annual net cash inflows would be:

Reduction in annual operating costs:

Operating costs, present hand method

$41,000

Operating costs, new machine

8,000

Annual savings in operating costs

33,000

Increased annual contribution margin:

5,300 boxes × $0.50 per box

2,650

Total annual net cash inflows

$35,650

Reduction in annual operating costs:

Operating costs, present hand method

$41,000

Operating costs, new machine

8,000

Annual savings in operating costs

33,000

Increased annual contribution margin:

5,300 boxes × $0.50 per box

2,650

Total annual net cash inflows

$35,650

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