Data Problem 1
SWEETWATER CANDY COMPANY
New machine cost	$120,000
Life expectancy in years	12
Overhaul costs in 6th year	$9,000
Selling price after 12 years	$7,500
Annual operating costs of machine	$7,000
Annual operating costs of manual dipping	$30,000
Increased box production from machine per year	6,000
Contribution margin per box	$1.50
Required return on investment	20%
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 cost $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% rate of return is required on all investments.
Required:
1. What are the net annual 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 dollar amounts to the nearest whole dollar.