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 $210,000.

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 $210,000. 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 $10,200, including installation. After five years, the machine could be sold for $5,000.

 The company estimates that the cost to operate the machine will be $8,200 per year. The present method of dipping chocolates costs $42,000 per year. In addition to reducing costs, the new machine will increase production by 4,000 boxes of chocolates per year. The company realizes a contribution margin of $1.45 per box. A 10% 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.

Explanation

1.

The annual net cash inflows would be:

Reduction in annual operating costs:
Operating costs, present hand method	$	42,000
Operating costs, new machine		8,200
Annual savings in operating costs		33,800
Increased annual contribution margin:
4,000 boxes × $1.45 per box		5,800
Total annual net cash inflows	$	39,600

2.

The net present value is computed as follows:

Thanks