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 $210,000. The manufacturer estimates that the machine would be usable for five years but would require the replacement of several key parts at the end of the third year. These parts would cost $10,200, including installation. After five years, the machine could be sold for $5,000. The company estimates that the cost to operate the machine will be $8,200 per year. The present method of dipping chocolates costs $42,000 per year. In addition to reducing costs, the new machine will increase production by 4,000 boxes of chocolates per year. The company realizes a contribution margin of $1.45 per box. A 10% rate of return is required on all investments. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. hat are the annual net cash inflows that will be provided by the new dipping machine? Operating Costs, Present Method: Operating Costs, New machine: Annual Savings: Increased Annual Contribution Margin: Total annual Net Cash inflow:

Compute the new machine’s net present value.

Compute the new machine’s net present value.

Explanation / Answer

Yearly Increase in production by new method                 4,000 boxes Contribution margin per box                   1.45 Additional contribution margin/year $      5,800.00 Nothimg mentioned about depreciation, so   depreciation factor ignored NPV of new machine Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment in Machine & parts          (210,000)     (10,200) Salvage                  5,000 Reduction in Operating Csot              33,800          33,800       33,800             33,800                33,800 Increased production contribution margin                5,800            5,800         5,800                5,800                  5,800 Net Cash flow          (210,000)              39,600          39,600       29,400             39,600                44,600 PV factor @10%                         1                0.909            0.826         0.751                0.683                  0.621 PV of net cash flows          (210,000)              36,000          32,727       22,089             27,047                27,693 NPV=            (64,444)

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