Question

the company is considering the purchase of machinery and equipment to set up a line to produce a combination washer-dryer.

They have given you the following information to analyze the project on a 5-year timeline: Initial cash outlay is $150,000, no residual value.

Sales price is expected to be $2,250 per unit, with $595 per unit in labor expense and $795 per unit in materials. Direct fixed costs are estimated to run $20,750 per month.

Cost of capital is 8%, and the required rate of return is 10%.

They will incur all operational costs in Year 1, though sales are expected to be 55% of break-even

. Break-even (considering only direct fixed costs) is expected to occur in Year 2. Variable costs will increase 2% each year, starting in Year 3.

Sales are estimated to grow by 10%, 15%, and 20% for years 3 - 5.

They have asked you to calculate: The product’s contribution margin

Break-even quantity

NPV

IRR

PROVIDE STEP BY STEP ANSWER TO THIS QUESTION WITH EXPLANATION OF WHY steps chosen for each calculation and what each calculated answer means for each .

Please explain why management made the decision based on the calculations above. What other factors should have been considered in managements decisions.

Answer 1

In above calculation management what is break even point of that project break even point is a point on which from have no profit no loss situation.

Management used fixed cost divided by contribution margin. Contribution margin represent the amount of profit after deducting variable cost.

Computation of cash inflow

In about calculation of flow of all variable and fixed costs deducted from the revenue to get net cash inflow from the project.

Npv is considered as NET gain from net cash inflow in present and considered the project is beneficial or not if project have any positive value then it should be considered as favourable otherwise it is adverse for business.

Management calculate npv to evaluate project

Irr is a situation on which npv zero. Management computed IRR to find return from the project

A B 6 Sales price p.u 7 -Labour cost p.u 8 -Material cost p.u 9 Contribution p.u $2250 -$595 -$795 $860 10 11 Contribution Margin 12 =Contribution/Sales price 13 0.382222222 14 38.22% 15 16 Break-Even Quantity 17 =Annual Fixed cost/Contribution p.u 18 289.5348837 19 290 units

Year 2. Sale (units) 159 290 319 367 440 *Sale Price p.u 2250 2250 2250 2250 2250 Total Sales (a) 357750 652500 717750 825750 990000 Variable cost p.u 1390 1390 1417.8 1446.156 1475.07912 -Total Variable cost (b) 221010 403100 452278.2 530739.252 649034.8128 c) -Direct Fixed Costs (20750* 249000 249000 249000 249000 249000 Total Cash Flows (a-b-c) -112260 16471.8 46010.748 400 91965.1872 Tax information is not given so amount of deprecaion deduction will have no impavt

A B 30 31 Computation of NPV 32 Year Amount 150000 33 34 -112260 35 2 400 36 3 16471.8 46010.748 37 4 38 91965.1872 8% 39 Rate 40 NPV formula =NPV(B39,B34:B38)-B33 -144116.43 41 NPV

A B 30 31 Computation of IRR 32 Year Amount 33 -150000 34 -112260 35 2 400 36 16471.8 3 37 4 46010.748 38 5 91965.1872 39 IRRformula =irr(B33:B38) 40 IRR -12% 41