The Sweetwater Candy Company would like to buy a new machine that would automati
ID: 2415051 • 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 $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 $1.50 per box. A 20% rate of return is required on all investments. (Ignore income taxes.)
What are the annual net cash inflows that will be provided by the new dipping machine? (Omit the "$" sign in your response.)
Compute the new machine's net present value. (Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)
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.
Explanation / Answer
Annual cash inflows Savings in costs (30000-7000) 23000 Increment in contribution (6000*1.50) 9000 Net cashinflow 32000 Pariculars Value PV factor @ 20% Present value Initial cash outflow -125000 1 -125000 Annual cash inflows 32000 4.192472 134159.1 Terminal cash flows 7500 0.161506 1211.292 Net Present Value 10370.4
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