Homework SoursePARELLT CHOCOLATESINC Cost of new machine Life expectancy of
PARELLT CHOCOLATES,INC. Cost of new machine Life expectancy of new machine, in years Parts replacement costs at the end of year 6 24,000 Salvage value of new machine at the end of year $ 8,000 $ 124,000 10 $ 7,000 Annual operating costs of new machine Annual operating costs of current method Increased production (boxes) per year Contribution margin per box Required return on investment $ 30,000 6,000 $ 1.50 14% 
Solution
1) FERELLI CHOCOLATES,INC. Net Annual Cash inflows Provided by the new Dipping Machine Reduction in annual operating costs: Annual operating costs using current hand method $ 30,000 Less:Annual operating costs of new machine $ 7,000 Annual Savings in operatting costs $ 23,000 Plus:Increased annual contribution margin due to increased production with the new machine 6000*$ 1.50 $ 9,000 Total Net Annual Cash inflows $ 32,000 2) Net Pesent Value of new machine Item Year (s) Amount of cash flows PV of cash flows Cost of the new machine now $ -1,24,000 $ -1,24,000 Part replacement costs end of 6th year 6 $ -24,000 $ -10,934 Net Annual Cash inflows 1-10 $ 32,000 $ 1,66,916 Salvage value of new machine 10 $ 8,000 $ 2,158 Net Present Value $ 34,140 Working: a. Discount factor @ 14% for now 1.0000 b. Discount factor @ 14% for year 6 1.14^-6 = 0.4556 c. Discount factor @ 14% for year 10 1.14^-10 = 0.2697 d. Discount factor @ 14% for year 1-10 (1-(1+0.14)^-10)/0.14 = 5.2161 e. Year Amount of cash flows Discount factor(s) Present Value now $ -1,24,000 1.0000 $ -1,24,000 6 $ -24,000 0.4556 $ -10,934 1-10 $ 32,000 5.2161 $ 1,66,916 10 $ 8,000 0.2697 $ 2,158 3) Investment in new machine has positive net present value($34,140).So, Farelli Chocolatets, Inc. should buy new machine. New machine will beneficial in two ways .First , it increases production to give additional contribution and second it reduces operating costs. Overall, It has positive Net Present Value which gives a sign for buying the machine.