Mastery Problem: Capital Investment Analysis Homegrown Company Home Grown Company is a chain of grocery stores that are similar to indoor farmer's markets, providing fresh, local produce, meats, and dairy products to consumers in urban areas. Homegrown is considering opening several stores in a new city, and has proposals from three contractors (Alpha, Beta, and Garra companies) who would like to provide buildings for the new stores The amount of expected revenue from the stores will depend on the design of the contractor. For example, if Home Grown decides on a more open floor plan, with less shelf space for products, revenue would be lower overall. However, if Home Grown decides on a very crowded floor plan, it may lose customers who appreciate a more open feel. As the project manager for Home Grown, you are responsible for deciding which if any of the proposals to accept HomeGrown's minimum acceptable rate of return is 20%. You receive the following data from the three contractors: Proposal Initial Cost Residual Type of Floor Plan if Selected Value Alpha Very coen, like an indoor farmer's market $1,472,000 $0.00 Beta Standard grocery shelving and layout, minimal aisle space 5,578,900 0.00 Gamma Mix of open areas and shelving areas 2,125,560 0.00 You have computed estimates of annual cash flows and average annual income from customers for each of the three contracters' plans. You believe that the annual cash flows will be equal for each of the 10 years for which you are preparing your capital investment analysis. Your conclusions are presented in the following table. Estimated Average Annual Cash Flow Proposal Estimated Average Annual Income (after depreciation) 5313,094 272,019 521,931 Alpha 5351,245 461,411 Beta Gamma 595,133 Actual Labor Rate Actual Labor Hours Used 2,000 Dark chocolate $14.60 per hr Light chocolate 15.40 per hr. 7,280 Required: 1. Prepare the following variance analyses for both chocolates and the total, based on the actual results and production levels at the end of the budget year: a. Direct materials price variance, direct materials quantity variance, and total variance. b. Direct labor rate variance, direct labor time variance, and total variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number. Direct materials price variance S Direct materials quantity variance Total direct materials cost variance s b. Direct labor rate variance s Direct labor time variance s Total direct labor cost variance S 2. The variance analyses should be based on the amounts at volumes. The budget must flex with the volume changes. If the volume is different from the planned volume, as it was in this case, then the budget used for performance evaluation should reflect the change in direct materials and direct labor that will be required for the production. In this way, spending from volume changes can be separated from efficiency and price variances. Net Present Value Even though you're fairly certain that your evaluation and elimination is correct, you would like to compare the three proposals using the net present value method, and get some data about the internal rate of retum of the proposals, each of which are expected to generate their respective annual net cash inflows for a period of 10 years. Compute the net present value of each proposal. You may need the following partial table of factors for present value of an annuity of $1. Round the present value of annual net cash flows to the nearest dollar. If your answer is zero enter "O". For the net present value, if required, use the minus sign (-) to indicate a negative amount. Present Value of an Annuity of $1 at Compound Interest (Partial Table) Year 10% 20% 1 0.905 0.833 5 3.791 2.991 10 4.192 Alpha Beta Gamma Annual net cash flow $ Present value factor Present value of annual net cash flows + $ S Amount to be invested Net present value $ $ s Final Questions Net present value Final Questions After reviewing all your data, answer the following questions (1)-(3). 1. What can you say about each proposal? Internal Rate of Return Proposal Alpha Beta Gamma 2. What can you say about these proposals? a. HomeGrown would be breaking even (ie, pront-0) if Alpha's proposal is chosen. b. Only Gamma's proposal is ylelding more than HomeGrown's minimum desired rate of retum. C. Gamma's proposal is the only proposal that would be acceptable to Home Grown. 3. Which proposal is the best choice for Home Grown given the data collected? Mastery Problem: Capital Investment Analysis Homegrown Company Home Grown Company is a chain of grocery stores that are similar to indoor farmer's markets, providing fresh, local produce, meats, and dairy products to consumers in urban areas. Homegrown is considering opening several stores in a new city, and has proposals from three contractors (Alpha, Beta, and Garra companies) who would like to provide buildings for the new stores The amount of expected revenue from the stores will depend on the design of the contractor. For example, if Home Grown decides on a more open floor plan, with less shelf space for products, revenue would be lower overall. However, if Home Grown decides on a very crowded floor plan, it may lose customers who appreciate a more open feel. As the project manager for Home Grown, you are responsible for deciding which if any of the proposals to accept HomeGrown's minimum acceptable rate of return is 20%. You receive the following data from the three contractors: Proposal Initial Cost Residual Type of Floor Plan if Selected Value Alpha Very coen, like an indoor farmer's market $1,472,000 $0.00 Beta Standard grocery shelving and layout, minimal aisle space 5,578,900 0.00 Gamma Mix of open areas and shelving areas 2,125,560 0.00 You have computed estimates of annual cash flows and average annual income from customers for each of the three contracters' plans. You believe that the annual cash flows will be equal for each of the 10 years for which you are preparing your capital investment analysis. Your conclusions are presented in the following table. Estimated Average Annual Cash Flow Proposal Estimated Average Annual Income (after depreciation) 5313,094 272,019 521,931 Alpha 5351,245 461,411 Beta Gamma 595,133 Actual Labor Rate Actual Labor Hours Used 2,000 Dark chocolate $14.60 per hr Light chocolate 15.40 per hr. 7,280 Required: 1. Prepare the following variance analyses for both chocolates and the total, based on the actual results and production levels at the end of the budget year: a. Direct materials price variance, direct materials quantity variance, and total variance. b. Direct labor rate variance, direct labor time variance, and total variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number. Direct materials price variance S Direct materials quantity variance Total direct materials cost variance s b. Direct labor rate variance s Direct labor time variance s Total direct labor cost variance S 2. The variance analyses should be based on the amounts at volumes. The budget must flex with the volume changes. If the volume is different from the planned volume, as it was in this case, then the budget used for performance evaluation should reflect the change in direct materials and direct labor that will be required for the production. In this way, spending from volume changes can be separated from efficiency and price variances. Net Present Value Even though you're fairly certain that your evaluation and elimination is correct, you would like to compare the three proposals using the net present value method, and get some data about the internal rate of retum of the proposals, each of which are expected to generate their respective annual net cash inflows for a period of 10 years. Compute the net present value of each proposal. You may need the following partial table of factors for present value of an annuity of $1. Round the present value of annual net cash flows to the nearest dollar. If your answer is zero enter "O". For the net present value, if required, use the minus sign (-) to indicate a negative amount. Present Value of an Annuity of $1 at Compound Interest (Partial Table) Year 10% 20% 1 0.905 0.833 5 3.791 2.991 10 4.192 Alpha Beta Gamma Annual net cash flow $ Present value factor Present value of annual net cash flows + $ S Amount to be invested Net present value $ $ s Final Questions Net present value Final Questions After reviewing all your data, answer the following questions (1)-(3). 1. What can you say about each proposal? Internal Rate of Return Proposal Alpha Beta Gamma 2. What can you say about these proposals? a. HomeGrown would be breaking even (ie, pront-0) if Alpha's proposal is chosen. b. Only Gamma's proposal is ylelding more than HomeGrown's minimum desired rate of retum. C. Gamma's proposal is the only proposal that would be acceptable to Home Grown. 3. Which proposal is the best choice for Home Grown given the data collected