Acct 505 Course Project B

ACCT505 Part B Capital Budgeting problem Clark Paints, Inc. 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 $12.00 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
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: 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 Tax After Tax Item Amount Effect 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 $200,000 / $97690 = 3.40 years

Part 3 Annual rate of return Accounting income as result of decreased costs Annual cash savings $104,540 Less Depreciation 32,000 Before tax income 72,540 Tax at 35%