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 $200,000. 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 $10,100, including installation. After five years, the machine could be sold for $9,000.

The company estimates that the cost to operate the machine will be $8,100 per year. The present method of dipping chocolates costs $41,000 per year. In addition to reducing costs, the new machine will increase production by 8,000 boxes of chocolates per year. The company realizes a contribution margin of $1.40 per box. A 20% rate of return is required on all investments.

  

Use Excel or spreadsheet to solve. Round answers to the nearest dollar.

    

Required:
1.	What are the annual net cash inflows that will be provided by the new dipping machine?

	Reduction in annual operating costs: Operating costs, present hand method $76,322 Operating costs, new machine 83,282 Annual savings in operating costs (6,960) Increased annual contribution margin 7,373 Total annual net cash inflows $413

2.	Compute the new machine’s net present value. (Any cash outflows should be indicated by a minus sign. Round final answers to the nearest whole dollar amount.)

	Now 1 2 3 4 5 Purchase of machine $626 $8,383 $78,373 $83,832 $823,823 $2,727 Annual net cash inflows 3,232 7,373 2,020 98,282 7,373 123,192 Replacement parts 2,323 9,282 8,282 28,929 82,829 23,877 Salvage value of machine 2,323 2,828 8,372 8,282 9,292 8,383 Total cash flows $8,504 $27,866 $97,047 $219,325 $923,317 $158,179 Net present value $232,321

Answer 1

1.	What are the annual net cash inflows that will be provided by the new dipping machine?

Reduction in annual operating costs:
Operating costs, present hand method	$41,000
Operating costs, new machine	$8,100
Annual savings in operating costs	$32,900
Increased annual contribution margin:
8000 boxes × $1.40 per box	$11,200
Total annual net cash inflows	$44,100

2.Compute the new machine’s net present value. (Any cash outflows should be indicated by a minus sign. Round final answers to the nearest whole dollar amount.)

	Now	1	2	3	4	5
Purchase of machine	($200,000)
Annual net cash inflows		$44,100	$44,100	$44,100	$44,100	$44,100
Replacement parts				($10,100)
Salvage value of machine						$9,000
Total cash flows (a)	($200,000)	$44,100	$44,100	$34,000	$44,100	$53,100
Discounted factor (20%) (b)	1.000	0.833	0.694	0.579	0.482	0.402
Present Value (a) X (b)	($200,000)	$36,735	$30,605	$19,676	$21,267	$21,339
Net Present Value	($70,377)