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The Sweetwater Candy Company would like to buy a new machinethat would automatically “dip” chocolates. The dipping operationcurrently is done largely by hand. The machine the company isconsidering costs $150,000. The manufacturer estimates that themachine would be usable for five years but would require thereplacement of several key parts at the end of the third year.These parts would cost $9,600, including installation. After fiveyears, the machine could be sold for $7,000.

The company estimates that the cost to operate the machine willbe $7,600 per year. The present method of dipping chocolates costs$36,000 per year. In addition to reducing costs, the new machinewill increase production by 8,000 boxes of chocolates per year. Thecompany realizes a contribution margin of $1.15 per box. A 13% rateof return is required on all investments.

Required:

1. What are the annual net cash inflows that will be provided bythe new dipping machine?

2. Compute the new machine’s net present value.

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Jamar Ferry
Jamar FerryLv2
28 Sep 2019

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