The Sweetwater Candy Company would like to buy a new machine that would automati
ID: 2474156 • 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 $190,000. 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 $10,000, including installation. After five years, the machine could be sold for $6,000.
The company estimates that the cost to operate the machine will be $8,000 per year. The present method of dipping chocolates costs $40,000 per year. In addition to reducing costs, the new machine will increase production by 7,000 boxes of chocolates per year. The company realizes a contribution margin of $1.35 per box. A 13% 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.
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 $190,000. 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 $10,000, including installation. After five years, the machine could be sold for $6,000.
The company estimates that the cost to operate the machine will be $8,000 per year. The present method of dipping chocolates costs $40,000 per year. In addition to reducing costs, the new machine will increase production by 7,000 boxes of chocolates per year. The company realizes a contribution margin of $1.35 per box. A 13% 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.
Explanation / Answer
Reduction in annual Operating Costs Operating Cost present 40000 Operating cost new Machine 8000 Annual saving In operating Costs 32000 Increased annual contribution 7000*1.35 9450 Total annual net cash flow 41450 Now 1 2 3 4 5 Purchase of machine -190000 Annual net cash inflows 41450 41450 41450 41450 41450 Replacement parts -10000 Salvage value of machine 6000 Total cash flows -190000 41450 41450 31450 41450 47450 Discount factor (21%) 1 0.89286 0.79719 0.71178 0.63552 0.56743 Present value -190000 37008.9 33043.7 22385.5 26342.2 26924.4 Net present value -44295
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