2. For this activity, you have been hired as a team of consultants on a multi-year basis for a global washer and dryer manufacturer. They currently offer two core washer and dryer sets: a high-end model and an economic model.

Later, 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.

Question

They have asked you to calculate:

• The products contribution margin
• Break-even quantity
• NPV
• IRR

Once you have determined these amounts, they have asked that you

• present the information,
• describe how you performed your calculations, and
• explain what the results mean

After you have completed the calculations and presented your work, management makes the investment.

• Explain how the project analyses do or do not support this decision.
• In either case, what are the factors that should have been considered in managements decision?

Note:

• Please describe the circumstances of the case study and make the required recommendations.
• Explain your approaches to the problems.
• perform relevant calculations and analyses and justify your recommendations.
• Evaluate the results and explain what each calculated value means. Ensure your work and conclusions are thoroughly supported.

Superior presentations will:

• Describe the circumstances.
• Perform all calculations correctly.
• Articulate how the calculations were performed.
• Evaluate the computations and explain their meanings.
• Make recommendations, supported by well-thought-out rationale and considering various factors that could impact the recommendations.

Background of question:

management has provided the following revenue and cost information:

	High-End Set		Economical Set
Sales price	$3,500	per unit	$1,000	per unit
Labor	$875	per unit	$250	per unit
Materials	$1400	per unit	$300	per unit
Direct fixed costs	$25,000	per month	$16,500	per month
Allocated fixed costs	$85,000	per month	$85,000	per month