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 $230,000. The manufacturer estimates that the machine would be usable for five years but would require the replacement of several key parts at the end of the third year. These parts would cost $10,400, including installation. After five years, the machine could be sold for $7,500.

The company estimates that the cost to operate the machine will be $8,400 per year. The present method of dipping chocolates costs $44,000 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 $1.55 per box. A 13% rate of return is required on all investments

Required:

1.

What are the annual net cash inflows that will be provided by the new dipping machine?

Reduction in annual operating costs: ?

Operating costs, present hand method = ?

Operating costs, new machine = ?

Annual Savings in operating costs = ?

Increased annual contribution margin = ?

Total annual net cash inflows = ?

2.	Compute the new machines net present value for now and each of the five years. Use the following terms: Purchase of machine, annual net cash inflows, Replacement parts, Salvage value of machine, Total cash flows, Discount factor (13%), Present value, Net present value