Wonka Candy Inc. 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 $100,000. The manufacturer estimates that the machine would be usable for 12 years, but, at the end of the sixth year, would require the replacement of several key parts that would cost $10,000, including installation. 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. The company 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 whole dollar.
Wonka Candy Inc. 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 $100,000. The manufacturer estimates that the machine would be usable for 12 years, but, at the end of the sixth year, would require the replacement of several key parts that would cost $10,000, including installation. 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. The company 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 whole dollar.
Fundamentals of Financial Management (MindTap Course List)
14th Edition
ISBN:9781285867977
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter12: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 16P: REPLACEMENT CHAIN The Fernandez Company has an opportunity to invest in one of two mutually...
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Question
![PROBLEM 10-1
eXcel Performing a Basic NPV Analysis [LO2 - CC8]
CHECK FIGURE
(1)
Annual cash flows: $30,000
Wonka Candy Inc. 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 $100,000. The manufacturer estimates that the machine would be usable
for 12 years, but, at the end of the sixth year, would require the replacement of several key parts that would cost $10,000, including
installation. 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. The
company 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 whole
dollar.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0efeb5ac-d980-4e93-a264-2f0df2dbe20d%2F03dadb87-33de-40be-8bbd-c0d41f803b36%2F0rcloc_processed.png&w=3840&q=75)
Transcribed Image Text:PROBLEM 10-1
eXcel Performing a Basic NPV Analysis [LO2 - CC8]
CHECK FIGURE
(1)
Annual cash flows: $30,000
Wonka Candy Inc. 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 $100,000. The manufacturer estimates that the machine would be usable
for 12 years, but, at the end of the sixth year, would require the replacement of several key parts that would cost $10,000, including
installation. 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. The
company 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 whole
dollar.
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