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 currently is done largely by hand. The machine the company is considering costs $140,000. 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 $9,500, 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 $7,500 per year. The present method of dipping chocolates costs $35,000 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 $1.10 per box. A 16% 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. Complete this question by entering your answers in the tabs below Required 1Required 2 What are the annual net cash inflows that will be provided by the new dipping machine? Total annual net cash inflows

Explanation / Answer

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Req 1: Casshflows YEAR0 YEAR1 YEAR2 YEAR3 YEAR4 YEAR5 Investment made -140000 Investment in parts -9500 salvage value 6000 Operating cost -7500 -7500 -7500 -7500 -7500 Saving in processing cst 35000 35000 35000 35000 35000 Contribution margin earned 7700 7700 7700 7700 7700 Net cash flows -140000 35200 35,200 25,700 35,200 41,200 Req 2: Net Present Value: YEAR0 YEAR1 YEAR2 YEAR3 YEAR4 YEAR5 Investment made -140000 Investment in parts -9500 salvage value 6000 Operating cost -7500 -7500 -7500 -7500 -7500 Saving in processing cst 35000 35000 35000 35000 35000 Contribution margin earned 7700 7700 7700 7700 7700 Net cash flows -140000 35200 35,200 25,700 35,200 41,200 PVF @ 16% 1 0.862069 0.743163 0.640658 0.552291 0.476113 Present value of Inflows -140000 30344.83 26159.33 16464.9 19440.65 19615.86 Net present value -27974

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