Problem 13-22 Basic Net Present Value Analysis [LO13-2] The Sweetwater Candy Com
ID: 2496761 • Letter: P
Question
Problem 13-22 Basic Net Present Value Analysis [LO13-2] 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 $120,000. 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 $9,000, including installation. After five years, the machine could be sold for $7,500 The company estimates that the cost to operate the machine will be $7,000 per year. The present method of dipping chocolates costs $30,000 per year. In addition to reducing costs, the new machine will increase production by 6,000 boxes of chocolates per year. The company realizes a contribution margin of $1.50 per box. A 20% rate of return is required on all investments Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. 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 inflowsExplanation / Answer
The Sweetwater Candy Company 1.Annual Net Cash inflow that will be provided by the new dipping Machine Reduction in aanual operating costs: Operating cost,present hand method $ 30,000.00 operating costs,new machine $ 7,000.00 Annual saving in operating costs $ 23,000.00 Increased annual contribution margin $ 9,000.00 (6000boxes*1.50 per box) Total annual net cash flow $ 32,000.00 2.Compute the new machine's net presen value Now 1 2 3 4 5 Purchase of machine $ (120,000.00) Annual net cash inflow $ 32,000.00 $ 32,000.00 $ 32,000.00 $ 32,000.00 $ 32,000.00 Replacement parts $ (9,000.00) Salvage value of machine $ 7,500.00 Total cash flows $ (120,000.00) $ 32,000.00 $ 32,000.00 $ 23,000.00 $ 32,000.00 $ 39,500.00 Discount Factor 1 0.833 0.694 0.578 0.482 0.402 Present Value $ (120,000.00) $ 26,656.00 $ 22,208.00 $ 18,496.00 $ 15,424.00 $ 12,864.00 Net Present Value $ (24,352.00)