# Accounting Project: Calculations

Pages: 2 (371 words) Published: September 4, 2011
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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