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 consideringcosts $120,000. The manufacturer estimates that the machine would be usable for 12 years but wouldrequire the replacement of several key parts at the end of the sixth year. These parts would cost $9,000, including installation. After 12 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 presentmethod of dipping chocolates costs $30,000 per year. In addition to reducing costs, the new machine willincrease 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.Required:(Ignore income taxes.)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. Use the incremental cost approach and round all dollaramounts to the nearest whole dollar.
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 12 years but would
require the replacement of several key parts at the end of the sixth year. These parts would cost $9,000, including installation. After 12 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%
Required:
(Ignore income taxes.)
1. What are the annual net
2. Compute the new machine’s
amounts to the nearest whole dollar.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
