Benny Company produces three productsA, B, and C. Data concerning the three products

follow (per unit):

Product A B C

Selling price $ 80 $ 56 $ 70

Variable expenses:

Direct materials 34 15 21

Other variable expenses 34 37 40

Total variable expenses 68 52 61

Contribution margin $ 12 $ 4 $ 9

The company estimates that it can sell 500 units of each product per month. The same raw material is used in each product. The material costs $3 per pound with a maximum of 5,000 pounds available each month.

Required:

Develop an Excel spreadsheet that will advise the company on:

1. Which orders the company should accept first, those for A, B, or C? Which orders second? Third? (6)
2. What is the maximum contribution margin that the company can earn per month if it makes optimal use of its 5,000 pounds of materials? (7)

Question2 24 Marks

Benny Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study, Benny estimated the following costs and revenues for the project:

Cost of new equipment needed 420,000

Installation of new equipment 80,000

Sale of old equipment no longer needed $40,000

Working capital needed $25,000

Equipment maintenance in Year 3 $24,000

Equipment maintenance in Year 4 $28,000

Annual revenues and costs:

Sales revenues (the information in question 1 apply here) but installing this equipment makes 30% more raw material per year available.

Variable expenses (the information in question 1 apply here ). Assume 12 months in a year.

The new piece of equipment mentioned above has a useful life of five years and a salvage value of $10000. At the end of the projects 5-year life the equipment will be converted to $10000 cash.

The old piece of equipment mentioned in the table above would be sold at the beginning of the project and there would be no gain or loss realized on its sale. Benny uses the straight-line depreciation method for financial reporting and tax purposes.

The companys tax rate is 30% and its after tax cost of capital is 16%.

When the project concludes in five years, the working capital will be released for investment elsewhere within the company.

Required: Develop an Excel spreadsheet to model the cashflow of this problem. As part of the evaluation calculate:

1. the annual income tax expense for each of years 1 through 5 that will arise as a result of this investment opportunity. (10)
2. the net present value of this investment opportunity. (5)
3. the Internal Rate of Return in this project (5)
4. Should they continue with the investment? Explain (4)