Reference no: EM132539988

The company is considering the purchase of machinery and equipment to set up a line to produce a combination washer-dryer. They have given you the following information to analyze the project on a 5-year timeline:

1. Initial cash outlay is $150,000, no residual value.
2. Sales price is expected to be $2,250 per unit, with $595 per unit in labor expense and $795 per unit in materials.
3. Direct fixed costs are estimated to run $20,750 per month.
4. Cost of capital is 8%, and the required rate of return is 10%.
5. They will incur all operational costs in Year 1, though sales are expected to be 55% of break-even.
6. Break-even (considering only direct fixed costs) is expected to occur in Year 2.
7. Variable costs will increase 2% each year, starting in Year 3. 
8. Sales are estimated to grow by 10%, 15%, and 20% for years 3 - 5.

They have asked you to calculate:

The product's contribution margin
Break-even quantity
NPV
IRR

• Once you have determined these amounts, they have asked that you present the information, describe how you performed your calculations, and explain what the results mean.
• After you have completed the calculations and presented your work, management makes the investment.

Question 1: Explain how the project analyses do or do not support this decision.

Question 2: In either case, what are the factors that should have been considered in management's decision?