Question

Big Al gives his worker's a one hour lunch and two fifteen minute breaks each day. He believes that a cold soda machine would be appreciated by his workers, and an appreciated worker is a good worker. He has priced a machine at a national member only warehouse for $2,050. The machine should be usable for 3 years, after which it would be inefficient, obsolete and would have to be disposed of at the dump. Big Al believes that 14 cans a day will be purchased. The plant is open five days a week, 50 weeks per year. A case of soda (24 cans) costs $6.24 and Big Al believes that a price of $.60 per can would win him good will. What is the estimated annual sales in cans of soda? 3,500 cans {17.01) What is the contribution margin per can of soda? (rounded to two places, $#.##) 0.34 {17.02 How many cans of soda must be sold each year to breakeven? (Round up to zero places, ######cans) 6029.41 {17.03} Annual incremental cash inflows from the soda machine? (rounded to two places, $#.##) 1,190.00 {17.04 What is the payback period in years? (rounded to two places, #.## years) {17.05} If the time value of money is 12% per year what is the net present value? Use the tables on page 18. {17.06 What is the internal rate of return. Pick the closest interest rate from the tables on page 18. {17.07)

Answer 1

(1) annual sales of can

=sales per day * number weeks * days per week working

=14*50*5

=3500 cans

(2) contribution margin = sales- variable costs

=$0.60-[6.24/24 cans]

=0.60-0.26

=0.34$ per can

(3) break even = fixed cost / contribution margin per unit

=$2050/$0.34

=6029.41 units must be sold

(4) incremental cash inflow

=expected sales in units * contribution margin per unit

=3500 cans * $0.34

=$1,190

(5) payback epriod fro even cash flow

= initial investment/ cash inflow per year

= $2050/1190

=1.72 years

(6) 12% NPV

NPV is the net present value difference between initial investment and present value of cash inflow

years	cash flow	pv factor at 12%	present value of cash flow
0	($2050)	1	($2,050)
1-3	$1,190	2.402	2858.38[1190*2.402]
		Net present value	$808.38
		2858.38-2050

(7)IRR is the rate of return where NPV is zero

At IRR total cash out flow = present value of cash inflow

2050 = 1190 * Present value factor

present value annuity factor = 1.723

from table it can be seen that for 3 years at 34% PV annuty factor is closest to 1.723

hence the IRR is 34%