The Sweetwater Candy Company would like to buy a new machine that would automati
ID: 2490910 • Letter: T
Question
The Sweetwater Candy Company would like to buy a new machine that would automatically 'dip' chocolates The doping operation s currently done largely by hand The machine the company is considering costs $210.000 The manufacturer estimates that tie machine would usable for five years but would require the replacement d 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 wit be $8,200 per yea. The present method of dipping chocolates costs $42,000 per year In addition to Leung costs, the new machine will increase production by 4.000 boxes of chocolates per year The company reeves a contortion margin of $1 45 per box. A 10% rale of return is required on at investments.Explanation / Answer
1
Calculation of Net cash inflows to be provided by new machine:
Reduction in annual operating costs :
Operating costs, present hand method
$ 42,000
Operating costs, new machine
$ 8,200
Annual Saving in operating costs (42000-8200)
$ 33,800
Increase annual contribution margin (4000 boxes * $1.45)
$ 5,800
Total Annual net cash inflows
$ 39,600
2
Calculation of New machine's Net present value:
Now
Year 1
Year 2
Year 3
Year 4
Year 5
Purchase of Machine
$ (210,000)
Annual Net cash inflows
$ 39,600
$ 39,600
$ 39,600
$ 39,600
$ 39,600
Replacement parts
$ (10,200)
Salvage value of Machine
$ 5,000
Total Cash Flows (CF)
$ (210,000)
$ 39,600
$ 39,600
$ 29,400
$ 39,600
$ 44,600
Discount Factor (DF) (10%)
1.00000
0.90909
0.82645
0.75131
0.68301
0.62092
1/(1 + 10%)^0
1/(1 + 10%)^1
1/(1 + 10%)^2
1/(1 + 10%)^3
1/(1 + 10%)^4
1/(1 + 10%)^5
Present value = CF*DF =
$ (210,000)
$ 36,000
$ 32,727
$ 22,089
$ 27,047
$ 27,693
Net present value = Sum of PVs =
$ (64,444)
1
Calculation of Net cash inflows to be provided by new machine:
Reduction in annual operating costs :
Operating costs, present hand method
$ 42,000
Operating costs, new machine
$ 8,200
Annual Saving in operating costs (42000-8200)
$ 33,800
Increase annual contribution margin (4000 boxes * $1.45)
$ 5,800
Total Annual net cash inflows
$ 39,600
2
Calculation of New machine's Net present value:
Now
Year 1
Year 2
Year 3
Year 4
Year 5
Purchase of Machine
$ (210,000)
Annual Net cash inflows
$ 39,600
$ 39,600
$ 39,600
$ 39,600
$ 39,600
Replacement parts
$ (10,200)
Salvage value of Machine
$ 5,000
Total Cash Flows (CF)
$ (210,000)
$ 39,600
$ 39,600
$ 29,400
$ 39,600
$ 44,600
Discount Factor (DF) (10%)
1.00000
0.90909
0.82645
0.75131
0.68301
0.62092
1/(1 + 10%)^0
1/(1 + 10%)^1
1/(1 + 10%)^2
1/(1 + 10%)^3
1/(1 + 10%)^4
1/(1 + 10%)^5
Present value = CF*DF =
$ (210,000)
$ 36,000
$ 32,727
$ 22,089
$ 27,047
$ 27,693
Net present value = Sum of PVs =
$ (64,444)
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