1 - Cornucopia Inc. is planning to invest in new manufacturing equipment to make
ID: 2475056 • Letter: 1
Question
1 -
Cornucopia Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The new garden tool is expected to generate additional annual sales of 4,000 units at $68 each. The new manufacturing equipment will cost $107,000 and is expected to have a 10-year life and $13,000 residual value. Selling expenses related to the new product are expected to be 5% of sales revenue. The cost to manufacture the product includes the following on a per-unit basis:
Determine the net cash flows for the first year of the project, Years 2–9, and for the last year of the project. Do not round your intermediate calculations but, if required, round your final answer to the nearest dollar.
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Munch N' Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $43,056 and could be used to deliver an additional 95,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of $0.45. The delivery truck operating expenses, excluding depreciation, are $1.35 per mile for 24,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $61,614. The new machine would require three fewer hours of direct labor per day. Direct labor is $18 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have seven-year lives. The minimum rate of return is 13%. However, Munch N' Crunch has funds to invest in only one of the projects.
a. Compute the internal rate of return for each investment. Use the above table of present value of an annuity of $1. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent.
b. The bagging machine rate of return was SelectgreaterlessItem 5 than the minimum rate of return requirement of 13% while the delivery truck rate of return was SelectgreaterlessItem 6 than the minimum rate of return requirement of 13%. Therefore the recommendation is to invest in the Selectbagging machinedelivery truckItem 7.
Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.352 2.991 6 4.917 4.355 4.111 3.784 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192Explanation / Answer
Answer: 1
Cornucopia Inc. Net cash flow Year 1 Year 2-9 Last year Initial investment 107000 Annual revenue 272000 272000 272000 Selling expenses 13600 13600 13600 Cost to manufacture 198600 198600 198600 Net operating cash flow 59800 59800 59800 Total for year 1 -47200 Total for year 2-9 59800 Residual value 13000 Total for last year 72800Related Questions
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