“Meals on Wheels” is a great organization that was originally developed to help out servicemen during WWII. It then continued its roots by serving Philadelphia in the 1950s as a home-delivery program serving those that are hungry.
The focus since the 70s has been to serve senior citizens who still live at home but are not capable making their food or even for others to bring them food. The company’s vision statement is as following: “Is to end senior hunger by 2020”. Although this vision statement is very short, but I think it gets to the point and others get the idea.In essence it explains why the company exists, and what it exists for. Generally it gives a detailed time-line and describes what it will do by a certain time-frame: which is end hunger! I think this vision is very effective one and it is empowering as well as motivating. This paper will discuss Mead Meals on Wheels Center (MMWC) and it efforts to provide two meals per day to the homebound elderly in the town of Millbridge.
The Town of Millbridge pays MMWC $32 per week for each person it services for the week.Each person receives 14 meals for the week. There is no shortage of demand for MMWC’s services among the elderly citizens of Millbridge and MMWC can find qualified recipients for as many meals as it can deliver. To service the contract,MMWC has a central kitchen which can produce a maximum of 9,600 meals per day.
It costs MMWC an average of $36,000 per week to operate the kitchen and MMWC’s other central facilities regardless of the number of meals that MMWC serves.This covers all of MMWC’s fixed costs (i. e. rent, equipment costs, and its personnel including administrative staff) as well as its fixed contract costs (e. g. , utilities, snow removal).
The difficulty that MMWC faces is figuring out how much funds to spend per person, per week for food to supply the program. Food is MMWC’s only variable expense. On the other hand, MMWC has a capital budgeting problem. They have to come to a decision whether MMWC should spend $625,000 for some new kitchen equipment.
In purchasing the equipment it will allow MMWC to prepare 10,400 meals per day.This is an increase of 800 meals per day. This means that MMWC can feed 400 more people per week with the addition of the equipment. Every person that MMWC feeds generates gross revenues of $32. Offsetting this is the marginal (variable) cost of providing them with food. Besides using the new food bid that the marginal cost of food is $23.
25 per person per week. ($24. 50 – $1. 25). So, each additional person that MMWC feeds results in a marginal “cash flow” (the excess of marginal revenue over marginal expenses) of $32 – $23.
25, or $8. 75 per person per week.Because the new equipment will let you feed 400 additional people per week, purchasing the equipment generates $3,500 ($8. 75 per person time’s 400 people) worth of cash flow each week. By using the net present value analysis MMWC would be able to justify the purchase of the equipment; therefore buying the equipment gives MMWC $3,500 of cash flow per week for 260 weeks (5 years times 52 weeks per year). This is an annuity.
In other words this will show the interest cost is 12% per annum, approximately . 23% per week (12% interest per annum divided by 52 weeks in a year).The periodic interest is 3% per quarter [12% divided by 4 quarters per year] and the number of periods is 20, i. e.
, 5 years ( 4 quarters per year). Purchasing the new equipment allows 10,400 meals, an increase of 800 over the existing situation. In estimation 800 meals translate to 400 more people fed per day. Revenue is $32 per person fed each week food will cost $24.
50-$1. 25=$23. 25 per person the extra weekly cash flow due to new equipment. The extra revenue is 12,800, extra food cost 9,300, and extra cash flow of 3,500.
As a result, the equipment further pays for itself even after the cost of capital is taken into account therefore; the organization should buy the equipment. The present values of these cash inflows and outflows are then calculated at the rate of return acceptable to the management, generally the cost of capital. Net Present Value helps measure the surplus in order to give in to better decision making on purchases such as large equipment or smaller items. The net present value of the cash flow from the investment is greater than zero.
