Question

The Sweetwater Candy Company would like to buy a new machine for $240,000 that automatically “dips” chocolates. The manufacturer estimates the machine would be usable for five years but would require replacement of several key parts costing $11,600 at the end of the third year. After five years, the machine could be sold for $5,000. The company estimates the cost to operate the machine will be $9,600 per year. The present labor-intensive method of dipping chocolates costs $56,000 per year. In addition to reducing costs, the new machine will increase production by 3,000 boxes of chocolates per year. The company realizes a contribution margin of $1.80 per box. A 13% rate of return is required on all investments. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: What are the annual net cash inflows provided by the new dipping machine? Compute the new machine’s net present value.

Answer 1

The annual net cash inflows provided by the new dipping machines would be $51,800 per year.

Step-by-step explanation:

To determine the annual net cash inflows provided by the new dipping machine, we need to consider the cost savings from reduced labor expenses and increased production. The cost savings from reduced labor expenses would be the difference between the current labor cost of $56,000 per year and the operating cost of $9,600 per year for the new machine. So, the cost savings from reduced labor expenses would be $56,000 - $9,600 = $46,400 per year.

The increase in production by 3,000 boxes of chocolates per year would result in additional revenue of 3,000 boxes x $1.80 contribution margin per box = $5,400 per year.

Therefore, the annual net cash inflows provided by the new dipping machine would be the sum of the cost savings from reduced labor expenses ($46,400) and the additional revenue from increased production ($5,400), which is $51,800 per year.