The Sweetwater Candy Company would like to buy a new machine

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 $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. 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 Operating costs, new machine Annual savings in operating costs Increased annual contribution margin Total annual net cash inflows 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 Purchase of machine Annual net cash inflows Replacement parts Salvage value of machine Total cash flows Net present value

Solution

Req 1: Reduction in Annual operating cost Operating cost under present 42,000 Less: Annual operation cost of machine 8,200 Annual savings in operating cost 33,800 Increased annual contribution margin 5800 Total Annual net chas flows 39600 Req 2: NPV: Now 1 2 3 4 5 Purchase of Machine -210000 Annual net cash flows 39600 39600 39600 39600 39600 Replacement parts -10200 Salvagee of machine 5000 Total cash flows -210000 39600 39,600 29400 39,600 44600 PVf @ 10% 1 0.9090909 0.82644628 0.751315 0.6830135 0.620921 Present value of cash inflows -210000 36000 32727.2727 22088.66 27047.333 27693.09 Net present value -64444