Acct 505 Course Project B

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ACCT505
Part B
Capital Budgeting problemClark Paints, Inc.

Data:
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 costs0
Number of workers needed3
Annual hours to be worked per employee2,000
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
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:
Wages72,000
Health benefits7,500
Other benefits12,960
Total wages and benefits92,460

Other variable production costs55,000

Total annual production costs$422,460

Annual cost to purchase cans$495,000

Part 1 Cash flows over the life of the project
Before TaxTaxAfter Tax
ItemAmountEffectAmount
Annual cash savings$72,5400.65$47,151
Tax savings due to depreciation32,0000.35$11,200

Total annual cash flow$58,351

Part 2 Payback Period

$200,000 / $97690 = 3.40years

Part 3 Annual rate of return
Accounting income as result of decreased costs
Annual cash savings$104,540
Less Depreciation32,000
Before tax income72,540
Tax at...
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