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…