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.
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
Please refer attached solution for complete details.
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 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.