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 $190,000. 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 $11,100, including installation. After five years, the machine could be sold for $8,000.

The company estimates that the cost to operate the machine will be $9,100 per year. The present method of dipping chocolates costs $51,000 per year. In addition to reducing costs, the new machine will increase production by 7,000 boxes of chocolates per year. The company realizes a contribution margin of $1.55 per box. A 21% rate of return is required on all investments.

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

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	0
Increased annual contribution margin
Total annual net cash inflows	$0

2.

Compute the new machines net present value. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s) and final answers to the nearest whole dollar amount.)

	Now	1	2	3	4	5
Purchase of machine
Annual net cash inflows
Replacement parts
Salvage value of machine
Total cash flows	$0	$0	$0	$0	$0	$0
Discount factor (21%)
Present value	0	0	0	0	0	0
Net present value	$0