Problem 13-22 Basic Net Present Value Analysis [LO13-2]
The Sweetwater Candy Company would like to buy a new machinethat would automatically âdipâ chocolates. The dipping operation iscurrently done largely by hand. The machine the company isconsidering costs $150,000. The manufacturer estimates that themachine would be usable for five years but would require thereplacement of several key parts at the end of the third year.These parts would cost $9,600, including installation. After fiveyears, the machine could be sold for $7,000.
The company estimates thatthe cost to operate the machine will be $7,600 per year. Thepresent method of dipping chocolates costs $36,000 per year. Inaddition to reducing costs, the new machine will increaseproduction by 8,000 boxes of chocolates per year. The companyrealizes a contribution margin of $1.15 per box. A 13% rate ofreturn is required on all investments.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables.
Required: 1. What are the annual net cash inflows that will be provided bythe new dipping machine?
2. Compute the new machineâs net present value. (Any cashoutflows should be indicated by a minus sign. Round discountfactor(s) to 3 decimal places and intermediate calculations tonearest dollar amount.)
Problem 13-22 Basic Net Present Value Analysis [LO13-2]
The Sweetwater Candy Company would like to buy a new machinethat would automatically âdipâ chocolates. The dipping operation iscurrently done largely by hand. The machine the company isconsidering costs $150,000. The manufacturer estimates that themachine would be usable for five years but would require thereplacement of several key parts at the end of the third year.These parts would cost $9,600, including installation. After fiveyears, the machine could be sold for $7,000. |
The company estimates thatthe cost to operate the machine will be $7,600 per year. Thepresent method of dipping chocolates costs $36,000 per year. Inaddition to reducing costs, the new machine will increaseproduction by 8,000 boxes of chocolates per year. The companyrealizes a contribution margin of $1.15 per box. A 13% rate ofreturn is required on all investments. |
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables. |
| Required: | |
| 1. | What are the annual net cash inflows that will be provided bythe new dipping machine? |
| 2. | Compute the new machineâs net present value. (Any cashoutflows should be indicated by a minus sign. Round discountfactor(s) to 3 decimal places and intermediate calculations tonearest dollar amount.) |
Related questions
The Sweetwater Candy Company would like to buy a new machinethat would automatically âdipâ chocolates. The dipping operation iscurrently done largely by hand. The machine the company isconsidering costs $190,000. The manufacturer estimates that themachine would be usable for five years but would require thereplacement of several key parts at the end of the third year.These parts would cost $11,100, including installation. After fiveyears, the machine could be sold for $8,000. | ||
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The Sweetwater Candy Company would like to buy a new machine thatwould automatically "dip" chocolates. The dipping operation iscurrently done largely by hand. The machine the company isconsidering costs $81,000. The manufacturer estimates that themachine would be usable for eight years but would require thereplacement of several key parts at the end of the fifth year.These parts would cost $6,600, including installation. After eightyears, the machine could be sold for $6,100. | ||
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