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 $150,000. 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 $9,600, including installation. After five years, the machine could be sold for $7,000.

The company estimates that the cost to operate the machine will be $7,600 per year. The present method of dipping chocolates costs $36,000 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 $1.15 per box. A 13% rate of return is required on all investments.

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

Computation of annual cash inflow
particulars	Amount
Reduction in annual operating costs
operating cost , present hand metod (A)	$                     36,000.00
Operating cost , new machine (B)	$                       7,600.00
Annual saving in operating cost	$                     36,000.00
increased annual contribution margin(A-B)	$                     28,400.00
Add: contribution(8000boxes*1.15)	$                       9,200.00
Total annual net cash inflows	$                     37,600.00
2. new machine Net present value
NOW	0	1	2	3	4	5
Purchase of machine	$               -1,50,000.00
annual net cash inflows		$ 37,600.00	$ 37,600.00	$ 37,600.00	$ 37,600.00	$ 37,600.00
replacement part		$                -	$ -9,600.00	$                -	$                -	$                -
salvage value of machine						$   7,000.00
total cash flows	$               -1,50,000.00	$ 37,600.00	$ 28,000.00	$ 37,600.00	$ 37,600.00	$ 44,600.00
discount factors(13%)	$                               1.00	$            0.89	$            0.78	$            0.69	$            0.61	$            0.54
Net present value	$               -1,50,000.00	$ 33,276.00	$ 21,926.80	$ 26,060.56	$ 23,060.08	$ 24,208.88
Net present value	$                   -21,468.00
here net present value =
(present value of cash inflow- innitial investment)