AC505
Part B
Capital Budgeting problemClark Paints

Cost of new equipment$200,000
Expected life of equipment in years5
Disposal value in 5 years$40,000
Life production - number of cans5,500,000
Annual production or purchase needs1,100,000
Initial training costs
Number of workers needed3
Annual hours to be worked per employee2,000
Earnings per hour for employees$12
Annual health benefits per employee$7,500
Other annual benefits per employee-% of wages18%
Cost of raw materials per can$0.25
Other variable production costs per can$0.05
Costs to purchase cans - per can$0.45
Required rate of return12%
Tax rate35%

MakePurchase

Annual cost of direct material:
Need of 1,100,000 cans per year$275,0000
Annual cost of direct labor for new employees:
Wages72,0000
Health benefits7,5000
Other benefits12,9600
Total wages and benefits92,460

Other variable production costs55,000

Total annual production costs$422,4600

Annual cost to purchase cans495,000

Before TaxAfter Tax
ItemAmountAmount
Annual cash savings$72,540$0
Tax savings due to depreciation32,000$0

Total annual cash flow$58,351

012345
200,000 141,649 83,298 24,947 0.43
58,351
3.43 years

Accounting income as result of decreased costs
Annual cash savings$72,540
Less Depreciation-32,000
Before tax income40,540
Tax at 35% rate14,189
After tax income$26,351

Before TaxAfter tax12% PVPresent
ItemYearAmountTax %AmountFactorValue
Cost of machine0$200,000
Cost of training0...

...ACCT505
Part B
Capital Budgeting problem Clark Paints, Inc.
Data:
Cost of new equipment $200,000
Expected life of equipment in years 5
Disposal value in 5 years $40,000
Life production - number of cans 5,500,000
Annual production or purchase needs 1,100,000
Initial training costs 0
Number of workers needed 3
Annual hours to be worked per employee 2,000
Earnings per hour for employees $12.00
Annual health benefits per employee $2,500
Other annual benefits per employee-% of wages 18%
Cost of raw materials per can $0.25
Other variable production costs per can $0.05
Costs to purchase cans - per can $0.45
Required rate of return 12%
Tax rate 35%
Make Purchase
Cost to produce
Annual cost of direct material:
Need of 1,100,000 cans per year $275,000
Annual cost of direct labor for new employees:
Wages 72,000
Health benefits 7,500
Other benefits 12,960
Total wages and benefits 92,460
Other variable production costs 55,000
Total annual production costs $422,460
Annual cost to purchase cans $495,000
Part 1 Cash flows over the life of the project
Before Tax Tax After Tax...

...Robert J. Hamilton
Acct 505- Devry
CourseProjectB
Clark Paints Summary and Analysis:
Pay-back period- 3.4 years
Annual Rate of Return: 13.18%
Net present Value: 33,035
Internal Rate of Return: 18%
According to this analysis, Clark Paints should purchase the new machine. The present value of the cost savings is $58,351, as compared to a present value of only $33,035. After deducting the two figures, net value totals $25,316. Typically wherever there is a net present value $0 dollars or greater, the investment project would be acceptable. Clark Paints could spend up to $58,351 for the new machine and still obtain the minimum required rate of return. A net present value of $33,035 shows that they have room for error of if there are underestimations in costs. Overall, it is clear that Clark Paints should accept the proposal. The project is attractive and a strong positive net present value gives them good insight the investment is safer and can be highly profitable.
...

...ACCT505
Part B
Capital Budgeting problem Clark Paints
Data:
Cost of new equipment $200,000
Expected life of equipment in years 5 yrs
Disposal value in 5 years $40,000
Life production - number of cans 5,500,000
Annual production or purchase needs $1,100,000
Initial training costs
Number of workers needed 3
Annual hours to be worked per employee 2000 hrs
Earnings per hour for employees $12
Annual health benefits per employee $2,500
Other annual benefits per employee-% of wages 18%
Cost of raw materials per can 0.25
Other variable production costs per can 0.05
Costs to purchase cans - per can 0.45
Required rate of return 12%
Tax rate 35%
Make Purchase
Cost to produce
Annual cost of direct material:
Need of 1,100,000 cans per year $275,000
Annual cost of direct labor for new employees:
Wages 72,000
Health benefits 7,500
Other benefits 12,960
Total wages and benefits 92,460
Other variable production costs 55,000
Total annual production costs $422,460
Annual cost to purchase cans $495,000 (72,540)
Part 1 Cash flows over the life of the...

...Accounting 505ProjectB
02/22/2015
Capital Budgeting is the process in which a business determines whether projects such as building, new plants or investing in a long-term venture are worth pursuing. Sometimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark (“Capital Budgeting” 2014). The most popular methods of capital budgeting is: net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF) and payback period. The term "present value" in NPV refers to the fact that cash flows earned in the future are not worth as much as cash flows today. (Gad, S” nd). The payback period is done by calculating the total cost of the project and divide it by how much cash inflow you expect to receive each year; this will give you the total number of years or the payback period (Gad, S nd). The internal rate of return (IRR) is a discounted rate that is commonly used to determine how much of a return an investor can expect to realize from a particular project. The internal rate of return is the discount rate that occurs when a project is break even, or when the NPV equals 0. Here, the decision rule is simple: choose the project where the IRR is higher than the cost of financing (Gad, S nd).
My recommendation for Clark Paints proposal would...

...ACCT505 Part B Capital Budgeting problem Data: Cost of new equipment Expected life of equipment in years Disposal value in 5 years Life production - number of cans Annual production or purchase needs Initial training costs Number of workers needed Annual hours to be worked per employee Earnings per hour for employees Annual health benefits per employee Other annual benefits per employee-% of wages Cost of raw materials per can Other variable production costs per can Costs to purchase cans - per can Required rate of return Tax rate
Clark Paints
$200,000 5 $40,000 5,500,000 1,100,000 0 3 2,000 $12.00 $2,500 18% $0.25 $0.05 $0.45 12% 35% Make Purchase
Cost to produce Annual cost of direct material: Need of 1,100,000 cans per year Annual cost of direct labor for new employees: Wages Health benefits Other benefits Total wages and benefits Other variable production costs Total annual production costs Annual cost to purchase cans
$275,000 72,000 7,500 12,960 92,460 55,000 $422,460 $495,000
Part 1 Cash flows over the life of the project Item Annual cash savings Tax savings due to depreciation Total annual cash flow Before Tax Amount $72,540 32,000 Tax Effect After Tax Amount 0.65 $47,151 0.35 $11,200 $58,351
Part 2 Payback Period $200,000 / $58,351 = 3.43 years
Part 3 Annual rate of return Accounting income as result of decreased costs Annual cash savings Less Depreciation Before tax income Tax at 35% rate After tax income...

...Ronice M. Bruce
Week 3_Course Project A - CASE STUDY
ACCT 505- Prof Main
January 26, 2013
Springfield Express is a luxury passenger carrier in Texas. All seats are first class, and the following data are available:
Number of seats per passenger train car 90
Average load factor (percentage of seats filled) 70%
Average full passenger fare $160
Average variable cost per passenger $70
Fixed operating cost per month $3,150,000
a. What is the break-even point in passengers and revenues per month?
Fixed cost | $ 3,150,000 | |
Selling price | $ 160 | |
Variable cost | $ 70 | |
Break-even (Passengers) | 35,000 | BE (Passengers) = Fixed cost/ (Selling price – Variable Cost) = 3,150,000 / 160-70 = 3,150,000 / 90 = 35, 000 |
Break-even (Revenue) | $5,625,000 | BE (Revenue) = Fixed Cost/Contribution Ratio Contribution Margin Ratio =[(Selling Price per unit – Variable Cost per unit) /Selling price per unit ] = (160-70)/160 = 56%BE Target Sales in $ = (Fixed cost + target income)/ contribution margin ratio = 3,500,000/56% = $5,625,000 |
Springfield Express needs 35,000 passengers to generate $5.625M in revenue to break-even per month....

...needed for each of the next five years.
The company would hire three new employees. These three individuals would be full-time employees working 2,000 hours per year and earning $12.00 per hour. They would also receive the same benefits as other production employees, 18% of wages, in addition to $2,500 of health benefits.
It is estimated that the raw materials will cost 25¢ per can and that other variable costs would be 5¢ per can. Since there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted.
It is expected that cans would cost 45¢ each if purchased from the current supplier. The company's minimum rate of return (hurdle rate) has been determined to be 12% for all new projects, and the current tax rate of 35% is anticipated to remain unchanged. The pricing for a gallon of paint, as well as the number of units sold, will not be affected by this decision. The unit-of-production depreciation method would be used if the new equipment is purchased.
Required:
1. Based on the above information and using Excel, calculate the following items for this proposed equipment purchase:
o Annual cash flows over the expected life of the equipment
o Payback period
o Annual rate of return
o Net present value
o Internal rate of return
2. Would you recommend the acceptance of this proposal? Why or why not? Prepare a short double-spaced Word paper elaborating and...