Course Project B Acc 505

Page 1 of 3

Course Project B Acc 505

By | June 2013
Page 1 of 3
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...