The Sweetwater Candy Company wants 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 $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 $11,100, including installation. After five years, the machine could be sold for $8,000.
The company estimates that the cost to operate the machine will be $9,100 per year. The present method of dipping chocolates costs $51,000 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 $1.55 per box. A 21% rate of return is required on all investments.
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.
Net present value:
"Net present value" the present value is calculated by the discounting the discount rate with annual cash flow of the organisation.The initial cost of investment is deducted from the total present value of investment.
Answer and Explanation:
1) The annual net cash inflows that will be provided by the new dipping machine is calculated below:
The new machine will increase production by 7,000 boxes of chocolates per year and
The company realizes a contribution margin of $1.55 per box.
The annual net cash inflows for the new dipping machine = 7,000 boxes of chocolates* $1.55 per box = $10,850
2) The new machine's net present value is calculated below:
Initial cost of new Machine = $51,000
Annual net cash inflows for the new dipping machine = $10,850
Period =5 Years
Discount rate = 21%
Net present value = $10,850*PVIFA( 21% , 5 years) - Initial cost of new Machine
= $10,850* 2.925988 - $51,000
= $31,746.93 - $51,000
Net present value of new machine =
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from Financial Accounting: Help and ReviewChapter 5 / Lesson 20