Accounting Project: Calculations

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Cost of new equipment $200,000
Expected life of equipment in years5 years
Disposal value in 5 years $40,000
Life production - number of cans 5,500,000
Annual production or purchase needs 1,100,000
Number of workers needed3
Annual hours to be worked per employee2000hours
Earnings per hour for employees $12.00
Annual health benefits per employee $2,500
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

Need of 1,100,000 cans per year *.25 $275,000
Variable production costs *.05 $55,000

Wages $72,000
Health benefits $7,500
Other benefits $12,960
Total wages and benefits $92,460

$422,460

$495,000 (72540)

Before TaxTax EffectAfter Tax
ItemAmount Amount
Annual cash savings (make vs buy) $72,540 0.65 $47,151 * Tax effect on Annual Cash Savings is 1 - tax rate
Tax savings due to depreciation $32,000 0.35 $11,200 * Tax effect on Depreciation is the tax rate

Total annual cash flow $58,351.00

Initial investment/ Annual Cash Saving
$200,000/ $58351=3.4 years

Annual cash savings (before tax effect) $72,540
Less Depreciation $(32,000)
Before tax income $40,540
Tax at 35% rate $(14,189)
After tax income $26,351
$ 26,351 / 200,00013.18%

Before TaxAfter tax12% PVPresent
ItemYearAmountTax %AmountFactorValue
Cost of machine0 $(200,000) $(200,000)1(200,000)
Annual cash savings1-5 $72,540 0.65...
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