Problem 13-22 Net Present Value Analysis [LO13-2] The Sweetwater Candy Company w
ID: 2564453 • Letter: P
Question
Problem 13-22 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 $160,000. 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 $9,700, including installation. After five years, the machine could be sold for $3,500.
The company estimates that the cost to operate the machine will be $7,700 per year. The present method of dipping chocolates costs $37,000 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 $1.20 per box. A 12% 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: (USE THREE DECIMAL PLACES FOR VALUES)
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.
Explanation / Answer
1)
2)Present value of annual cash flow =[PVF12%,1*CF1]+[PVF12%,2*CF2]+.....[PVF12%,5*CF5]
=[ .89286*34100]+[.79719*34100]+[.71178*24400]+[.63552*34100]+[.56743*37600]
= 30446.53+ 27184.18+ 17367.43+ 21671.23+ 21335.37
= $ 118,004.737
NPV = Present value -initial cost
= 118,004.737-160,000
= - 41,995.263
year 1,2,4,5 2 year3 4 5 saving in cost 37000-7700=29300 29300 29300 29300 29300 Incremental revenue [4000*1.2] 4800 4800 4800 4800 4800 less:Incrementalinstallation cost - 0 -9700 0 0 salvage/sale value realised 3500 Annual cash flow 34100 34100 24400 34100 37600