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 $120,000. 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 $9,300, including installation. After five years, the machine could be sold for $4,000.

The company estimates that the cost to operate the machine will be $7,300 per year. The present method of dipping chocolates costs $33,000 per year. In addition to reducing costs, the new machine will increase production by 2,000 boxes of chocolates per year. The company realizes a contribution margin of $1.00 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.

Answer 1

Answer-1)-The annual net cash inflows that will be provided by the new dipping machine are= $27700.

Explanation-

Annual net cash inflows
Particulars	Amount
	$
Reduction in annual opertaing costs
Operating costs,present hand method	33000
Operating costs,new machine	7300
Annual savings in opertaing costs	25700
Add-Increased annual contribution margin	2000
(2000 boxes*$1.00 per box)
Total annual net cash inflows	27700

2)-The new machine’s net present value = $(33356).

Explanation-

SWEETWATER CANDY COMPANY
Net Present Value
Particulars	Cash Flows	Present Value Factor @16%	Present value
	(a)	(b)	(c=a*b)
Net cash flow per year (For 5 years)	27700	3.274	90698
New Equipment (1st Year)	-120000	1	-120000
Cost of parts replacement (in 3 year)	-9300	0.6407	-5959
Salvage value ( in 5th year)	4000	0.4761	1904
Net Present Value			-33356