Question 14.7: While working as a clerk at the IGA Store, Rajiv has learned...
While working as a clerk at the IGA Store, Rajiv has learned much about the cost of different foods. The kitchen manager at Pacific Diner called recently, requesting Rajiv to estimate the raw material cost over the next five years of introducing rice and dahl (lentils) to the buffet line. To develop his estimate, Rajiv has used his advanced knowledge of soil growing conditions, world demand, and government subsidy programs for these two crops. He has estimated the following data:
• Costs for lentils will inflate at 3% per year for the next three years and then at 4% for the following two years.
• Costs for rice will inflate at 8% per year for the next two years and then will decrease by 2% in each of the following three years.
The kitchen manager wants to know the equivalent annual cost of providing rice and dahl on the buffet line over the five year period. His before-tax MARR is 20%. An average of 50 kilos each of lentils and rice will be needed every day. The hotel kitchen operates six days a week, 52 weeks a year. Current costs are $0.35/kg for lentils and $0.80/kg for rice.
Today’s cost for one year’s supply is
Lentils $0.35/kg × 50 kg/day × 6 day/wk × 52 wk/yr = $5,460/yr
Rice $0.80/kg × 50 kg/day ×6 day/wk × 52 wk/yr = $12,480/yr
| Year | Lentils | Rice | Total |
| 0 | $5,460 | $12,480 | |
| 1 | 5,460(1.03) = 5,624 | 12,480(1.08) = 13,478 | $19,102 |
| 2 | 5,624(1.03) = 5,793 | 13,478(1.08) = 14,556 | 20,349 |
| 3 | 5,793(1.03) = 5,967 | 14,556(1.02)^{-1}= 14,271 | 20,238 |
| 4 | 5,967(1.04) = 6,206 | 14,271 (1.02)^{-1} = 13,991 | 20,197 |
EUAC = [19,102(P/F, 20%, 1) + 20,349(P/F, 20%, 2) + 20,238(P/F, 20%, 3) + 20,197(P/F, 20%, 4) + 20,171(P/F, 20%, S)](A/P, 20%, 5)
= $19,900 per year