Acct 505 Project Part B

ACCT505 Part B Capital Budgeting problem Clark Paints Data: Cost of new equipment $200,000 Expected life of equipment in years 5 yrs 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 Number of workers needed 3 Annual hours to be worked per employee 2000 hrs 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 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 (72,540)

Part 1 Cash flows over the life of the project Before Tax After Tax Item Amount Amount Annual cash savings $72,540 65% $47,151 Tax savings due to depreciation 32,000 35% $11,200 Total annual cash flow 104,540 $58,351

Part 2 Payback Period $200,000/40,000 5 Years

Part 3 Annual rate of return Accounting income as result of decreased costs Annual cash savings $104,540 Less Depreciation -32,000