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The Sweetwater Candy Company would like to buy a new machine thatwould automatically "dip" chocolates. The dipping operation iscurrently done largely by hand. The machine the company isconsidering costs $95,000. The manufacturer estimates that themachine would be usable for six years but would require thereplacement of several key parts at the end of the sixth year.These parts would cost $6,700, including installation. After sixyears, the machine could be sold for $6,400.

The company estimates that the cost to operate the machine will be$13,500 per year. The present method of dipping chocolates costs$43,000 per year. In addition to reducing costs, the new machinewill increase production by 6,000 boxes of chocolates per year. Thecompany realizes a contribution margin of $0.4 per box. A 9% rateof return is required on all investments. (Ignore incometaxes.)

To determine the appropriate discount factor(s) using tables, clickhere to view Exhibit 12B-1 and Exhibit 12B-2. Alternatively, if youcalculate the discount factor(s) using a formula, round to three(3) decimal places before using the factor in the problem.

What are the annual net cash inflows that will be provided by thenew dipping machine?

Compute the new machine's net present value. Use the incrementalcost approach.

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Collen Von
Collen VonLv2
28 Sep 2019

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