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 $200,000. 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 $11,200, including installation. After five years, the machine could be sold for $9,000.

      The company estimates that the cost to operate the machine will be $9,200 per year. The present method of dipping chocolates costs $52,000 per year. In addition to reducing costs, the new machine will increase production by 8,000 boxes of chocolates per year. The company realizes a contribution margin of $1.60 per box. A 18% rate of return is required on all investments.

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

Compute the new machine’s net present value. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places and intermediate calculations to nearest dollar amount.)

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 $200,000. 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 $11,200, including installation. After five years, the machine could be sold for $9,000.

      The company estimates that the cost to operate the machine will be $9,200 per year. The present method of dipping chocolates costs $52,000 per year. In addition to reducing costs, the new machine will increase production by 8,000 boxes of chocolates per year. The company realizes a contribution margin of $1.60 per box. A 18% rate of return is required on all investments.

Explanation / Answer

1 Reduction in annual operating costs: Operating costs, present hand method 52000 Operating costs, new machine 9200 Annual savings in operating costs 42800 Increased annual contribution margin ( 8000 * 1.60) 12800 Total annual net cash inflows 55600 2) Now 1 2 3 4 5 Purchase of machine -200000 Annual net cash inflows 55600 55600 55600 55600 55600 Replacement parts -11200 Salvage value of machine 9000 Total cash flows -200000 55600 55600 44400 55600 64600 Discount factor (18%) 1 0.8475 0.7182 0.6086 0.5158 0.4371 Present value ( Total cash flow * Discount factor) -200000 47121 39931.92 27021.84 28678.48 28236.66 Net present value -200000 -152879 -112947.1 -85925.24 -57246.8 -29010.1

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