PROBLEM 10-1eXcel Performing a Basic NPV Analysis [LO2 - CC8]CHECK FIGURE(1)Annual cash flows: $30,000Wonka Candy Inc. would like to buy a new machine that would automatically dip chocolates. The dipping operation is currently donelargely by hand. The machine the company is considering costs $100,000. The manufacturer estimates that the machine would be usablefor 12 years, but, at the end of the sixth year, would require the replacement of several key parts that would cost $10,000, includinginstallation. After 12 years, the machine could be sold for about $7,500.The company estimates that the cost to operate the machine will be only $10,000 per year. The present method of dipping chocolates costs$31,000 per year. In addition to reducing costs, the new machine will increase production by 6,000 boxes of chocolates per year. Thecompany 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 wholedollar.

NPV is also known as Net Present Value.. It is a capital budgeting technique which helps in decision…

Answered: Wonka Candy Inc. would like to buy a…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $46,000 and a remaining useful life of five years. It can be sold now for $56,000. Variable manufacturing costs are $44,000 per year for this old machine. Information on two alternative replacement machines follows. The expected useful life of each replacement machine is five years. Machine A Machine B Purchase price $ 116,000 $ 129,000 Variable manufacturing costs per year 21,000 13,000 (a) Compute the income increase or decrease from replacing the old machine with Machine A. (b) Compute the income increase or decrease from replacing the old machine with Machine B. (c) Should Lopez keep or replace its old machine? (d) If the machine should be replaced, which new machine should Lopez purchase?
Whispering Winds Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it runs). The new truck would cost $56,525. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,500. At the end of eight years, the company will sell the truck for an estimated $27,600. Traditionally, the company has used a general rule that it should not accept a proposal unless it has a payback period that is less than 50% of the asset's estimated useful life. William Davis, a new manager, has suggested that the company should not rely only on the payback approach but should also use the net present value method when evaluating new projects. The company's cost of capital is 8%. (a) Calculate the cash payback period and net present value of the proposed investment. (If the net present value is negative, use either a…
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Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $47,000 and a remaining useful life of five years. It can be sold now for $57,000. Variable manufacturing costs are $47,000 per year for this old machine. Information on two alternative replacement machines follows. The expected useful life of each replacement machine is five years. Machine A Machine B Purchase price $ 118,000 $ 132,000 Variable manufacturing costs per year 20,000 14,000 (a) Compute the income increase or decrease from replacing the old machine with Machine A.(b) Compute the income increase or decrease from replacing the old machine with Machine B.(c) Should Lopez keep or replace its old machine?(d) If the machine should be replaced, which new machine should Lopez purchase?

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