The Sweetwater Candy Company would like to buy a new machine that would automati
ID: 2491200 • 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 constdering costs $100,000. 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 $9,100. 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 $7,100 per year. The present method of dipping chocolates costs $31,000 per year. In addition to reducing costs, the new machine will increase production by 5,000 boxes of chocolates per year. The company realizes a contribution margin of $0.90 per box. A 21% rate of return is required on all investments. Click here to view Exhibit 11B-1 and Exhibit 11B-2. to determine the appropriate discount factors) using tables. Required: 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. Use the appropriate table to determine the discount factor(s) and final answers to the nearest whole dollar amount.)Explanation / Answer
1.Calculation of Annual Net Cash Inflows
Particulars
Amount(in $)
Reduction in Annual Operating Costs
Operating Costs, present hand method
31,000
Operating costs, new machine
(7,100)
Annual savings in operating costs
23,900
Increased Annual contribution margin (5,000*0.90)
4,500
Total Annual net cash inflow
28,400
2.Calculation of Net Present Value (Amount in $)
Particulars
Now
1
2
3
4
5
Purchase of Machine
(100,000)
Annual net cash inflows
28,400
28,400
28,400
28,400
28,400
Replacement Parts
(9,100)
Salvage value of machine
6,000
Total Cash flows
(100,000)
28,400
28,400
19,300
28,400
34,400
Discounting Factor (21%)
1
0.8264
0.6830
0.5645
0.4665
0.3855
Present Value
(100,000)
23,470
19,397
10,895
13,249
13,261
Net Present Value = $(19728)
Note: Since exhibit links are not given, appropriate present values are considered at 4 decimal points.
Particulars
Amount(in $)
Reduction in Annual Operating Costs
Operating Costs, present hand method
31,000
Operating costs, new machine
(7,100)
Annual savings in operating costs
23,900
Increased Annual contribution margin (5,000*0.90)
4,500
Total Annual net cash inflow
28,400
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