Managerial accounting solving contribution margin,

Question

Please help me I am having a lot of difficulty trying to solve this.

 

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 $2,250. 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 16 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 $6.00 and Big Al believes that a price of $.60 per can would win him good will.

 

The estimated annual sales in cans of soda is 4,000 cans.

 

What is the contribution margin per can of soda? 

 

How many cans of soda must be sold each year to breakeven? 

 

Annual incremental cash inflows from the soda machine?

 

What is the payback period in years? 

 

If the time value of money is 12% per year what is the net present value? 

 

What is the internal rate of return. 

Answer 1

I think we have a problem with NPV. 

The PV of the $1,400 for 3 years at 12% discount factor is

 

N= 3

I=12%

PV=????

PMT= $1,400

FV= 0  

 

PV=  $3,362.56   less capital expenditure of $2,259 for a;

NPV of = $1,112.56

 

IRR=  

N= 3

I=???

PV= -$2250

PMT= $1,400

FV= 0

 

I or IRR=  39.11%

Answer 2

The contribution margin per can of soda=$0.35 cents; Can price $0.60- Can Cost $0.25.

 

The Number of cans to be sold to break even is 6429 Cans and it will take 2.67 years to break-even; 1st yr 2400, 2nd yr2400and 3rd yr 1629; 6429x.35margin=2250 machine cost.

 

Annual incremental cash flows $1400 per year (4000 cans/yr x0.35margin per can).

 

The pay back period =1.6years ($initial investment cost 2250 / 1400 margin per yr)

 

The Internal rate of return is 50.2% (1400 margin less interest 270= 1130 profit)

 

The net present value is $2,989, it is higher than the original investment of $2,250 (cost of machine)