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 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 part:s would cost $11,100, including installation. After five years, the machine could be sold for $8,000 The company estimates that the cost to operate the machine will be $9,100 per year. The present method of dipping chocolates costs $51,000 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 $1.55 per box. A 21% 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.

Explanation / Answer

Annual net cash inflows = 52,750

In excel, NPV = NPV(21%, 52750....60750) - 190000 = -38,835.64

Sweetwater 0 1 2 3 4 5 Investment -190000 -11100 Salvage 8000 Add. Sales 10850 10850 10850 10850 10850 Savings 51000 51000 51000 51000 51000 Cost -9100 -9100 -9100 -9100 -9100 Cash Flows -190000 52750 52750 41650 52750 60750 NPV -$38,835.64

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