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Payback, Net Present Value, Internal Rate of Return, Effects of differences in Sales on Project Viability For discount factors use Exhibit 128 and Exhibit 128-2. Shafte Ready Mais processor and supplier of concrete, aggregate, and rock products. The company operates in the intermountain Wester United States. Currently, Shatelas 14 cement processing plants and a labor force of more than 375 employees. With the exception of cement powder, al materials (e... aggregates and sand) are produced internally by the company. The demand for concrete and aggregates has been growing steadily nationally. In the West, the growth rate has been above the national average. Because of this growth, Shafel has more than tripled its gross revenues over the past 10 years. of the Intermountain states, Arizona has been experiencing the most growth. Processing plants have been added over the past several years, and the company is considering the addition of yet another plant to be located in Scottsdale. A major advantage of another plant in Arizona is the ability to operate your round, a feature not found in states such as Utah and Wyoming In setting up the new plant, land would have to be purchased and a small building constructed. Equipment and furniture would not need to be purchased. These items would be transferred from a plant that opened in Wyoming during the ot boom period and dosed a few years after the end of that boom. However, the equipment needs some repair and modifications before it can be used. The equipment has a book value of $200,000, and the furniture has a book value of $30,000. Nether has any outside market value. Other costs, such as the installation of so, well, electrical hookups, and so on, wil be incurred. No selvage values expected. The summary of the stal investment costs by category s as follows: Land $20,000 Building 135,000 Equipment Book value 200,000 Modifications 20.000 Furniture (book valve 30.000 Site 20,000 Well 50,000 Dlectrical hookups 27,000 General setup 50,000 Total $582,000 Estimates concerning the operation of the Scottsdale plant follow: Life of plant and equipment 10 years Expected annual sales in cubic yards of cement) 35,000 Selling price (per cubic yard of cement) $45.00 Variable costs (per cubic yard of cement): Cement $12.94 Sand/gravel 6.42 Fly ash 1.13 Admixture 1.53 Driver labor 3.24 Mechanics 1.43 Plant operations (batching and cleanup) 1.39 Loader operator 0.50 Truck parts 1.75 Fuel 1.48 Other 3.27 Total variable costs 35.08 Fixed costs (annual): Salaries 135,000 Insurance 75,000 5,000 Telephone Depreciation 58,200 * Depreciation ulties Total xed costs 25.000 298.200 Straight-line depreciation is calculated by using all initial investment costs over a 10-year period, assuming no salvage value Aher reviewing these data, Kari Flemming, vice president of operations, argued against the proposed plant. Karl was concerned because the plant would earn significantly less than the normal 8.3% return on sales All other plants in the company were earning between 7.5 and 8.5% on sales. Kartaiso noted that it would take more than 5 years to recover the total initial outlay of $582,000. In the past, the company had always isted that payback be no more than 4 years. The company's cost of capital # 104. Assume that there are no income taxes Required: 1. Prepare a variable costing income statement for the proposed plant Shaftol Ready Mix Income Statement For the Proposed Plant Sales 1.575.000 Less: Variable expenses 1.221.000 X Contribution margin 17.00 Les fed expenses Salaries 13.00 Insurance 9.000 Telephone 5.000 Depreciation 8.000X Utilities 28.000 246,00 x 91,200 Net Income Comote the ratio of net income to sales. Enter as a percent, rounded to two decimal places 3,24 Is Karl correct that the return on sale is significantly lower than the company average? Yes 2. Compute the payback period for the proposed plant. Round to two decimal places 3.28 years Is Karlight that the payback period is greater than years? No 3. Compute the NPV and the IRR for the proposed plant. Round present value calculations and finat NPV to the nearest dollar NY $352,000 TRR The IRR is between 18% and 20% X Would your answer be affected if you were told that the furniture and equipment could be sold for their book values ? Yes If your answer would be affected if you were told that the furniture and equipment could be sold for their book values, repeat the analyse with this effect considered. If not, leave the entry boxes blank. Round present value calculations and final NV to the nearest dollar. NOV 306,698 IRR The TR is between 12% and 14% 4. Compute the cubic Yards of cement that must be sold for the new plant to break even. Round your answer to the nearest whole number 29.859 X cubic Yards Uning this break-even volume, compute the Now and the RAIL Round present value calculations and finally to the nearest whole dotar NPV NPV Using this break-even volume, compute the NPV and the IRR. Round present value calculations and final NPV to the nearest whole dollar. -6,675 The IRR is between 9% and 10% Would the investment be acceptable? No IRR 5. Compute the volume of cement that must be sold for the IRR to equal the firm's cost of capital. Round your answer to the nearest whole number. 1,086 X cubic Yards Using this volume, compute the firm's expected annual income. Round your answer to the nearest whole dollar 1,083 X per year