Reference no: EM132906081

Question - Melt Choco Sdn. Bhd. is considering the purchase of automated dipping machine in producing chocolates. The dipping operation is currently done largely using the semimanual machine. The Management Accountant of the company has assembled the following information with regard to the automated dipping machine:

1. The new machine would cost RM200,000 with scrap value of RM20,000 at the end of year six.

2. The new machine would incur software and installation costs of RM80,000 and another monthly maintenance cost of RM3,000.

3. The manufacturer estimates that the new machine would be useful for 6 years but it would require the replacement of worn-out part at the end of year three. These parts would cost RM45,000.

4. The new machine would replace six workers at a cost saving of RM108,000 per year.

5. The new machine also would provide annual saving of RM6,500 in reduced material waste.

6. The company estimates that the new machine would increase annual production by 8,000 unit. The contribution margin of the chocolate is RM1.80 per unit.

7. The old dipping machine would be disposed of at a scrap value of RM12,000.

8. A 16 % rate of return is required on all investments. The discount factor of 16% rate of return is provided below:

Required -

a. Calculate the annual net cost savings could be provided by the automated dipping machine.

b. Show computation of the automated dipping machine's net present value. Would you recommend the management of purchasing the automated dipping machine? Explain.