Course Project B Acc 505
AC505 Part B Capital Budgeting problem Clark Paints
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 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 $7,500 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 Annual cost of direct material: Need of 1,100,000 cans per year $275,000 0
Annual cost of direct labor for new employees: Wages 72,000 0 Health benefits 7,500 0 Other benefits 12,960 0 Total wages and benefits 92,460 Other variable production costs 55,000 Total annual production costs $422,460 0 Annual cost to purchase cans 495,000
Before Tax After Tax Item Amount Amount Annual cash savings $72,540 $0 Tax savings due to depreciation 32,000 $0 Total annual cash flow $58,351
0 1 2 3 4 5 200,000 141,649 83,298 24,947 0.43 58,351 3.43 years
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
Before Tax After tax 12% PV Present Item Year Amount Tax % Amount Factor Value Cost of machine 0 $200,000 Cost of training 0 92,460
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 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 $7,500 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 Annual cost of direct material: Need of 1,100,000 cans per year $275,000 0
Annual cost of direct labor for new employees: Wages 72,000 0 Health benefits 7,500 0 Other benefits 12,960 0 Total wages and benefits 92,460 Other variable production costs 55,000 Total annual production costs $422,460 0 Annual cost to purchase cans 495,000
Before Tax After Tax Item Amount Amount Annual cash savings $72,540 $0 Tax savings due to depreciation 32,000 $0 Total annual cash flow $58,351
0 1 2 3 4 5 200,000 141,649 83,298 24,947 0.43 58,351 3.43 years
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
Before Tax After tax 12% PV Present Item Year Amount Tax % Amount Factor Value Cost of machine 0 $200,000 Cost of training 0 92,460