Cody's Candy Shop would like to buy a new machine (with CCA rate 20%)that will automatically dip
Question:
Cody's Candy Shop would like to buy a new machine (with CCA rate 20%)that will automatically "dip" chocolates as they are formed in the production process. The "dipping" operation is currently done by hand. The machine cost is $150,000 and is estimated to have a useful life of four years and would require replacement parts at the end of year two costing $4,000 including installation. At the end of four years, the machine would be sold for $5,000. Cody estimates that it will cost $7,000 per year to operate the machine compared to the current method by hand costing $15,000 per year.
The machine would result in an increase in production each year of 6,000 boxes with a contribution margin of $2.00 per box.
Cody's tax rate is 35%, and its after-tax rate of return is 9%.
Required:
Show the calculation for determining the net present value of this investment. Explicitly state whether the equipment should be purchased. This calculation should be completed without using excel.
Managerial Accounting
ISBN: 978-0697789938
13th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer