The Sweetwater Candy Company would like to buy a new machine that would automati
ID: 2474033 • 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 $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. Required: 1. What are the annual net cash inflows that will be provided by the new dipping machine? 2. 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.)
Explanation / Answer
Answer (1)
PV of Net Cash Inflow
Year
contribution by additional box
Saving in dipping cost
Total Contribution
PV @ 10%
PV of total contribution
1
5,800.00
42,000.00
47,800.00
0.909
43,454.55
2
5,800.00
42,000.00
47,800.00
0.826
39,504.13
3
5,800.00
42,000.00
47,800.00
0.751
35,912.85
4
5,800.00
42,000.00
47,800.00
0.683
32,648.04
5
5,800.00
42,000.00
47,800.00
0.621
29,680.04
Total
1,81,199.61
Answer (2)
PV of Machine
Year
Expense
Replacement
Salvage Value
PV @ 10%
PV of Machine Cost
0
2,10,000.00
-
-
1.000
2,10,000.00
1
8,200.00
-
-
0.909
7,454.55
2
8,200.00
-
-
0.826
6,776.86
3
8,200.00
10,200.00
-
0.751
13,824.19
4
8,200.00
-
-
0.683
5,600.71
5
8,200.00
-
5,000.00
0.621
8,196.16
Total
2,51,852.47
Answer (1)
PV of Net Cash Inflow
Year
contribution by additional box
Saving in dipping cost
Total Contribution
PV @ 10%
PV of total contribution
1
5,800.00
42,000.00
47,800.00
0.909
43,454.55
2
5,800.00
42,000.00
47,800.00
0.826
39,504.13
3
5,800.00
42,000.00
47,800.00
0.751
35,912.85
4
5,800.00
42,000.00
47,800.00
0.683
32,648.04
5
5,800.00
42,000.00
47,800.00
0.621
29,680.04
Total
1,81,199.61
Answer (2)
PV of Machine
Year
Expense
Replacement
Salvage Value
PV @ 10%
PV of Machine Cost
0
2,10,000.00
-
-
1.000
2,10,000.00
1
8,200.00
-
-
0.909
7,454.55
2
8,200.00
-
-
0.826
6,776.86
3
8,200.00
10,200.00
-
0.751
13,824.19
4
8,200.00
-
-
0.683
5,600.71
5
8,200.00
-
5,000.00
0.621
8,196.16
Total
2,51,852.47
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