Option 1: Offer by food chain A well-known national food chain is looking into providing specialty mini-cakes by Sweet beginnings, packaged in individual clear plastic containers with the chain's label clearly displayed. The chain is offering the Sweet Beginnings $1.50 per mini-cake for a 3-year agreement guaranteed for 2,200,000 min-cakes. They are also offering a possibility of extension if the mini-cakes prove successful. The mini-cakes would be made using existing recipes and ingredients but would require a large investment in special packaging machinery of $450,000 with a 10-year life, and an investment in specialized cake molds of $50,000. Sweet beginnings had hired a consultant firm to look for expansion opportunities, which charged $200 for its upfront services, and a commission of $100 if the agreement goes ahead. Sweet beginnings would expect to achieve a 15% net profit margin on the agreement. Option 2: Labeling machine As an alternative option, the chief accountant has pointed out that labeling poses the main holdup in operations. Hence, the business should consider investing in a new labeling machine (different from the machinery required in Option 1) with an estimated five-year life. Some For Us packs require especially heavy labor to assemble the different flavors, snap on the plastic lid, and affix the labels in the right spot. The new machine would cost $500,000 and save an estimated $14,500 per month in labor cost. It is also expected to increase revenues by $13,000 per month with roughly 20% markup on incremental production costs (excluding new investment). Required for Part 2: The owners would like a recommendation on which of the two equipment investment opportunities they should take. You should assess each opportunity incremental costs and revenues, over their estimated lives. Calculate their return on investment (ROI) for each year, and compare to current ROI of the business. Also use the tools of investment appraisal such as net present value and payback period to assess the opportunities. Give comments on any other factors that may be relevant to the decision, and should be considered (such as risk, strategic or technical factors). What action would you recommend the business should take? [20] Option 1: Offer by food chain A well-known national food chain is looking into providing specialty mini-cakes by Sweet beginnings, packaged in individual clear plastic containers with the chain's label clearly displayed. The chain is offering the Sweet Beginnings $1.50 per mini-cake for a 3-year agreement guaranteed for 2,200,000 min-cakes. They are also offering a possibility of extension if the mini-cakes prove successful. The mini-cakes would be made using existing recipes and ingredients but would require a large investment in special packaging machinery of $450,000 with a 10-year life, and an investment in specialized cake molds of $50,000. Sweet beginnings had hired a consultant firm to look for expansion opportunities, which charged $200 for its upfront services, and a commission of $100 if the agreement goes ahead. Sweet beginnings would expect to achieve a 15% net profit margin on the agreement. Option 2: Labeling machine As an alternative option, the chief accountant has pointed out that labeling poses the main holdup in operations. Hence, the business should consider investing in a new labeling machine (different from the machinery required in Option 1) with an estimated five-year life. Some For Us packs require especially heavy labor to assemble the different flavors, snap on the plastic lid, and affix the labels in the right spot. The new machine would cost $500,000 and save an estimated $14,500 per month in labor cost. It is also expected to increase revenues by $13,000 per month with roughly 20% markup on incremental production costs (excluding new investment). Required for Part 2: The owners would like a recommendation on which of the two equipment investment opportunities they should take. You should assess each opportunity incremental costs and revenues, over their estimated lives. Calculate their return on investment (ROI) for each year, and compare to current ROI of the business. Also use the tools of investment appraisal such as net present value and payback period to assess the opportunities. Give comments on any other factors that may be relevant to the decision, and should be considered (such as risk, strategic or technical factors). What action would you recommend the business should take? [20]