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.) Solve this question using your financial calculator or Excel, NOT the tables in the chapter. 5.value: 2.00 pointsRequired information

Requirement 1: What are the annual net cash inflows that will be provided by the new dipping machine?

Requirement 2: Compute the new machine's net present value.

Explanation / Answer

1. Annual net cash inflows:

2. New machine's net present value:

Present value of cash inflows ( 10 years at 20% discount rate) =(32,000 x 4.192) + (7,500 x 0.162) = $ 135,359

Present value of cash ouflows = $ 125,000

Net present value = ( 135,359 - 125,000) = $ 10,359

A spreadsheet calculation on excel of the above:

$ Additional contribution margin due to expended sales 9,000 Reduction in annual costs 30,000 Less operating costs per year (7,000) Net additional annual cash flows 32,000

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.