Cost of new equipment $200,000
Expected life of equipment in years 5 years
Disposal value in 5 years $40,000
Life production - number of cans 5,500,000
Annual production or purchase needs 1,100,000
Number of workers needed 3
Annual hours to be worked per employee 2000 hours
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
Need of 1,100,000 cans per year *.25 $275,000
Variable production costs *.05 $55,000
Wages $72,000
Health benefits $7,500
Other benefits $12,960
Total wages and benefits $92,460
$422,460
$495,000 (72540)
Before Tax Tax Effect After Tax
Item Amount Amount
Annual cash savings (make vs buy) $72,540 0.65 $47,151 * Tax effect on Annual Cash Savings is 1 - tax rate
Tax savings due to depreciation $32,000 0.35 $11,200 * Tax effect on Depreciation is the tax rate
Total annual cash flow $58,351.00
Initial investment/ Annual Cash Saving
$200,000/ $58351= 3.4 years
Annual cash savings (before tax effect) $72,540
Less Depreciation $(32,000)
Before tax income $40,540
Tax at 35% rate $(14,189)
After tax income $26,351
$ 26,351 / 200,000 13.18%
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)
Annual cash savings 1-5 $72,540 0.65…