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 $95,000. The manufacturer estimates that the machine would be usable for six years but would require the replacement of several key parts at the end of the sixth year. These parts would cost $6,700, including installation. After six years, the machine could be sold for $6,400.
The company estimates that the cost to operate the machine will be $13,500 per year. The present method of dipping chocolates costs $43,000 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 $0.4 per box. A 9% rate of return is required on all investments. (Ignore income taxes.)
To determine the appropriate discount factor(s) using tables, click here to view Exhibit 12B-1 and Exhibit 12B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.
- What are the annual net cash inflows that will be provided by the new dipping machine?
- Compute the new machine's net present value. Use the incremental cost approach.