# Accounting Project: Calculations

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Cost of new equipment \$200,000 Expected life of equipment in years 5 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 needed 3 Annual hours to be worked per employee 2000 hours 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

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 Tax Tax Effect After Tax Item Amount 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 / 200,000 13.18%

Before Tax After tax 12% PV Present Item Year Amount Tax % Amount Factor Value Cost of machine 0 \$(200,000) \$(200,000) 1 (200,000) Annual cash savings 1-5 \$72,540 0.65

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