Question

9...LeoneCompany produces flash drives for computers, which it sells for $20 each. Each flash drive costs $6 of variable costs to make. During April, 1,000 drives were sold. Fixed costs for March were $2per unit for a total of $1,000 for the month. How much is the contribution margin ratio?

10...Aaron Co. is considering purchasing a new machine which will cost $200,000, but which will decrease costs each year by $40,000. The useful life of the machine is 10 years. The machine would be depreciated straight-line with no residual value over its useful life at the rate of $20,000/year.  The cash payback period is

11...ABC Company is considering two capital investment proposals. Estimates regarding each project are provided below:

                                                    Project Blue          Project Gray

Initial investment                           $400,000               $550,000

Annual net income                            20,000                   47,000

Net annual cash inflow                    100,000                 125,000

Estimated useful life                         5 years                  7 years

Salvage value                                            0                            0

The company requires a 9% rate of return on all new investments.

Attach an MS Excel document showing formulas for Project Gray 1) the present value of the cash flows, 2) the net present value of this project and 3) the time it takes to get the cash pay back.

Answer 1

9.

Contribution margin ratio = Contribution / Sales * 100

Contribution margin ratio = $20-6 / $20 * 100

Contribution margin ratio = 70%

10.

Cash pay back period = Initial investment / Annual cash inflow

Cash pay back period = $200,000 /60,000 (40,000+20,000) = 3.33 Years

11.

Present value of cash flow = Net annual cash inflow * 5.03295 (PVAF@9%, 7 years)

Present value of cash flow = $125,000 * 5.03295 = $629,118.75

Net present value = Present value of cash flow - Initial investment

Net present value = $629,118.75 - 550,000 = $79,118.75

Cash pay back period = Initial investment / Net annual cash inflow

Cash pay back period = $550,000 / 125,000 = 4.4 years