Problem
The management of Jus' Buss Delights is considering investing in an ice-cream machine. The purchase price ofthe ice-cream machine is $1,200,000. The installation cost is $100,000, shipping and handling cost amounts to $150,000. The machine has an estimated life of4 years and will be disposed of for $50,000. Management is estimating that the new ice-cream machine will sales by 20,000 units at a cost of $45 per unit but the entity will incur variable production cost of $11.50 per unit. Variable distribution cost per unit will amount to $9.20. Consideration has been given to increase the unit prices (revenues and expenses) increased by 1% each year. The operators invested heavily in the entity and it was all equity financed but recently they acquired a loan which represents 60% ofthe financing. The rate of return on debt is 25% and equity is 15%. The entity has a tax rate of 20% and depreciation is considered an allowable deduction for tax purposes.
Task
1. The annual operating income after tax and the operating cash ?ows of the project and the net present value (NPV).
2. Internal Rate of Return and Profitability index of the project.
3. A Recommendation to the management team to accept or reject the project.
4. Discuss three factors that the entity can consider when implementing this project?