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Calculating Net Cash Inflows and Net Present Values

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The confectioner corner Inc. would like to buy a new machine that automatically dips chocolates. The dipping operation is currently done largely by hand. The machine the company is considering costs $100,000. The machine would be usable for 10 years but would requirement of several key parts at the end of the fifth year. These parts would cost $7000, including installation. After 10 years, the machine could be sold for $6000.

The company estimates that cost to operate the machine will be $6500 per year. The present method of dipping costs $24000 per year. In addition to reducing costs, the new machine will increase the production by 5,500 boxes of chocolate per year. The company realizes a contribution margin of $2.10 per box. An 18% rate of return is required on all investments.

Required

1. What are net 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 nearest whole numbaers

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Solution Summary

Solution describes the steps in finding net cash inflows for a proposal of buying a chocolate dipping machine. Net present Value of all years is calculated to see whether project is feasible or not.

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Solution:

Tabulation of Information Given In Problem
All figures in $
Cash Outflow Cash inflow Net PV
At the end Price of Repair Operational Total Value of Savings Increased production Total Cash @18%
of year Machine Costs Costs Outflow Old Machine ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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