ACCT505
Part B
Capital Budgeting problem Clark Paints
Data:
Cost of new equipment $200,000
Expected life of equipment in years 5
Disposal value in 5 years $40,000
Life production - number of cans 5,500,000
Annual production or purchase needs 1,100,000
Initial training costs 0
Number of workers needed 3
Annual hours to be worked per employee 2,000
Earnings per hour for employees $12
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
Cost to produce
Annual cost of direct material:
Need of 1,100,000 cans per year $275,000 $495,000.00
Annual cost of direct labor for new employees:
Wages 72,000
Health benefits 7,500
Other benefits 12,960
Total wages and benefits 92,460
Other variable production costs 55,000
Total annual production costs $422,460
Annual cost to purchase cans $495,000
, Part 1 Cash flows over the life of the project
Before Tax After Tax
Item Amount Amount
Annual cash savings $72,540 0.65 $47,151
Tax savings due to depreciation 32,000 0.35 $11,200
Total annual cash flow $58,351
Part 2 Payback Period
200000/58351 3.43
Part 3 Annual rate of return
Accounting income as result of decreased costs
Annual cash savings $72,540
Less Depreciation 32,000
Before tax income 40,540
Tax at 35% rate 14,189
After tax income $26,351
26351/200000 13.18%
Part 4 Net Present Value
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
Cost of training 0
Annual cash savings 1-5 72,540 0.65 47,151 3.6048 169,970
Tax savings due to depreciation 1-5 32,000 0.35 11,200 3.6048 40,374
Disposal value 5 40,000 40,000 0.5674 22,696
Net Present Value
$33,040
Part B
Capital Budgeting problem Clark Paints
Data:
Cost of new equipment $200,000
Expected life of equipment in years 5
Disposal value in 5 years $40,000
Life production - number of cans 5,500,000
Annual production or purchase needs 1,100,000
Initial training costs 0
Number of workers needed 3
Annual hours to be worked per employee 2,000
Earnings per hour for employees $12
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
Cost to produce
Annual cost of direct material:
Need of 1,100,000 cans per year $275,000 $495,000.00
Annual cost of direct labor for new employees:
Wages 72,000
Health benefits 7,500
Other benefits 12,960
Total wages and benefits 92,460
Other variable production costs 55,000
Total annual production costs $422,460
Annual cost to purchase cans $495,000
, Part 1 Cash flows over the life of the project
Before Tax After Tax
Item Amount Amount
Annual cash savings $72,540 0.65 $47,151
Tax savings due to depreciation 32,000 0.35 $11,200
Total annual cash flow $58,351
Part 2 Payback Period
200000/58351 3.43
Part 3 Annual rate of return
Accounting income as result of decreased costs
Annual cash savings $72,540
Less Depreciation 32,000
Before tax income 40,540
Tax at 35% rate 14,189
After tax income $26,351
26351/200000 13.18%
Part 4 Net Present Value
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
Cost of training 0
Annual cash savings 1-5 72,540 0.65 47,151 3.6048 169,970
Tax savings due to depreciation 1-5 32,000 0.35 11,200 3.6048 40,374
Disposal value 5 40,000 40,000 0.5674 22,696
Net Present Value
$33,040
