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 $125,000. The manufacturer estimates that the machine would be usable for 10 years. After 10 years, the machine could be sold for $7,500.


The company estimates that the cost to operate the machine will be $7,000 per year. The present method of dipping chocolates costs $30,000 per year. In addition to reducing costs, the new machine will increase production by 6,000 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. (Ignore income taxes.)

Explanation / Answer

a)Increased revenue = 6,000*1.5 = $9,000 Incremental cash flow each year = $9,000-$7,000 + $30,000= 32000 b)NPV = -$125,000 + 32000/1.2 + 32000/1.2^2.... (32000+ $7,500)/1.2^10 NPV = $10,370.40

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