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likeus2
Dec 12, 2013, 04:10 PM
Thank you so much.
Data:
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 0
Number of workers needed 3
Annual hours to be worked per employee 2,000
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
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

For the Cash flow over the life of the project section.

Annual cash savings 72,540 (495,000-422,460) Before Tax Amount
Tax Effect = .55 (=1-.45)
After Tax Amount = 39,897 (72,540*.55)

Tax savings due to depreciation
32,000 (200,000-40,000)* 1,100,000/5,500,000
Tax Effect =.45
After Tax Amount 14,400 (32,000*.45)

Total annual cash flow is now 54,297 ( I am off by 4054).
Did I miss something? Thank you.

pready
Dec 13, 2013, 02:44 PM
You are correct until your annual cash savings part. You used the wrong tax rate. The tax rate is 0.35 so your tax effect is 0.65 (1-.35).

Your tax saving due to depreciation part, your tax effect is 0.35

Once you change your tax effects parts and recalculate your totals you should be at $58,351 total annual cash flow.