Question

Problem 12-22 Net Present Value Analysis (LO12-2] 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 $170,000. 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 $9,800, 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 $7,800 per year. The present method of dipping chocolates costs $38,000 per year. In addition to reducing costs, the new machine will increase production by 5,000 boxes of chocolates per year. The company realizes a contribution margin of $1.25 per box A 16% 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 Required: 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 What are the annual net cash inflows that will be provided by the new dipping machine? Total annual net cash inflows Required 1 Required 2 >

Answer 1

Total annual net cash inflows
reduction in annual operating cost
operating cost of old machine				38000
less: operating cost of new machine				-7800
annual saving in operating cost				30200
incremental annual contribution(5000*1.25)				6250
Total annual net cash inflows				36450
2) Net present value
			now	year 1	year 2	year 3	year 4	year 5
purchase of machine			-170000
net cash inflow				36450	36450	36450	36450	36450
replacement						-9800
salvage value								6000
total net cash inflow			-170000	36450	36450	26650	36450	42450
pv factor @16%			1	0.8621	0.7432	0.6407	0.5523	0.4761
present value of cash flow			-170000	31423.55	27089.64	17074.66	20131.34	20210.45
total present value of cash inflow			115929.62
less: purchase of machine			-170000
net present value			-54070.38