The Sweetwater Candy Company would like to buy a new machine that would automatically dip chocolates. The
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 $190,000. 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 $10,000, including installation. After five years, the machine could be sold for $6,000.
The company estimates that the cost to operate the machine will be $8,000 per year. The present method of dipping chocolates costs $40,000 per year. In addition to reducing costs, the new machine will increase production by 7,000 boxes of chocolates per year. The company realizes a contribution margin of $1.35 per box. A 13% rate of return is required on all investments.
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. (Use the tables to get your discount factors. The linked tables are the same tables as the ones in your course packet. If you calculate discount factors using Excel or a financial calculator, your answer may be different enough due to rounding that the system will mark it wrong.)
Required:
1. What are the annual net cash inflows that will be provided by the new dipping machine? (Hint: This is asking for the incremental change in the (undiscounted) yearly cash flows if they buy the machine.)
2. Compute the new machines net present value.