Liquid Chemical Case

Chapter 04 - Fundamentals of Cost Analysis for Decision Making

4-61. (continued) Incremental Cash Flow – Alternative A Make Containers and Perform Maintenance
Year of Operation 2 3

0 Buy GHL Tax savings on purchase Cash flow on purchase Other materials Labor: Supervisor Labor: Workers Rent: Warehouse Maintenance Other expenses Manager's salary Total costs Tax savings Cash flow due to costs Tax effects of depreciation Tax effect of GHL costs Total cash flow Discount rate factor (10%) Present value NPV

1

4

$(500,000) (50,000) (450,000) (85,000) (36,000) (157,500) (80,000) $(1,358,500) 543,400 $(815,100) 60,000 80,000 $(675,100) 0.9091 $(613,727)

$(500,000) (50,000) (450,000) (85,000) (36,000) (157,500) (80,000) $(1,358,500) 543,400 $(815,100) 60,000 80,000 $(675,100) 0.8264 $(557,934)

$(500,000) (50,000) (450,000) (85,000) (36,000) (157,500) (80,000) $(1,358,500) 543,400 $(815,100) 60,000 80,000 $(675,100) 0.7513 $(507,213)

$(500,000) (50,000) (450,000) (85,000) (36,000) (157,500) (80,000) $(1,358,500) 543,400 $(815,100) 60,000 80,000 $(675,100) 0.6830 $(461,102)

5 $(240,000) $96,000 $(144,000) $(500,000) (50,000) (450,000) (85,000) (36,000) (157,500) (80,000) $(1,358,500) 543,400 $(815,100) $(959,100) 0.6209 $(595,526)

1.0000

$(2,735,502)

4-51

Chapter 04 - Fundamentals of Cost Analysis for Decision Making

4-61. (continued) Incremental Cash Flow – Alternative B Make Containers and Buy Maintenance
0 Buy GHL Tax savings on purchase Cash flow on purchase Other materials Labor: Supervisor Labor: Workers Rent: Warehouse Maintenance Other expenses Manager's salary Maintenance contract Total costs Tax savings Cash flow due to costs Tax effects of depreciation Tax effect of GHL costs Total cash flow Discount rate factor (10%) Present value NPV 1 Year of Operation 2 3 4 5 $(120,000) $48,000 $(72,000) $(450,000) (50,000) (360,000) (85,000) (36,000) (92,500) (80,000) (375,000) $(1,528,500) 611,400 $(917,100) 32,000 $(957,100) 0.6209