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 considenng costs S160.000. The manufacturer estimates that the machine would be usable lor five years but would require the replacement of several key parts at the end of the third year. These parts would cost $9,700. including installation. After five years, the machine could be sold for $3,500. The company estimates that the cost to operate the machine will be $7,700 per year The present method of dipping chocolates costs S37.000 per year. In addition to reducing costs, the new machine wd increase production by 4.000 boxes of chocolates per year The company realizes a contribution margin of $1.20 per box. A 12% rate of return is required on all investments. What are the annual net cash inflows that w* be provided by the new dipping machine?

Explanation / Answer

1 Particulars Amount($) Reduction in annaul operating costs Operating cost old machine 37000 Less: Operating costs new machine -7700 Annual saving in operating costs 29300 Incremental annual contribution 4000*1.2 4800 Total annual net cash inflows 34100 2 Particulars Now 1 2 3 4 5 Purchase of machine -160000 Annal net cash inflows 34100 34100 34100 34100 34100 Replacement parts -9700 Salvage value of machine 3500 Total cash flows -160000 34100 34100 24400 34100 37600 Discount factor 12% 1 0.8928571 0.797193878 0.7117802 0.635518 0.567427 Present value -160000 30446.429 27184.31122 17367.438 21671.17 21335.25 Net Present value -41995.40591

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