Acct 505 Project Part B

Topics: Net present value, Cash flow, Internal rate of return Pages: 4 (620 words) Published: August 25, 2012
Part B
Capital Budgeting problemClark Paints

Cost of new equipment$200,000
Expected life of equipment in years5 yrs
Disposal value in 5 years$40,000
Life production - number of cans5,500,000
Annual production or purchase needs$1,100,000
Initial training costs
Number of workers needed3
Annual hours to be worked per employee2000 hrs
Earnings per hour for employees$12
Annual health benefits per employee$2,500
Other annual benefits per employee-% of wages18%
Cost of raw materials per can0.25
Other variable production costs per can0.05
Costs to purchase cans - per can0.45
Required rate of return12%
Tax rate35%

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:
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(72,540)

Part 1 Cash flows over the life of the project
Before TaxAfter Tax
Annual cash savings$72,54065%$47,151
Tax savings due to depreciation32,00035%$11,200

Total annual cash flow104,540$58,351

Part 2 Payback Period

$200,000/40,0005 Years

Part 3 Annual rate of return
Accounting income as result of decreased costs
Annual cash savings$104,540
Less Depreciation...
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