I have tried the assignment myself let me send you what I did so that you can help me correcting it.
Here is what I have thus far:
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
Number of workers needed 3
Annual hours to be worked per employee 2000
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%
Cost to produce Make Purchase
Annual cost of direct material:
Need of 1,100,000 cans per year $330,000.00
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
Total annual production costs $514,920
Annual cost to purchase cans $495,000
Part 1 Cash flows over the life of the project
Before Tax Tax Effect After Tax
Item Amount Amount
Annual cash savings (make vs buy)$19,920 0.65 $12,948 *Tax effect on Annual Cash Savings =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 $24,148.00
Part 2 Payback Period 200000/24148 8.3 Years
Part 3 Annual rate of return
Accounting income as result of decreased costs
Annual cash savings (before tax effect) $19,920
Less Depreciation $(32,000)
Before tax income $(12,080)
Tax at 35% rate $(4,228)
After tax income $(16,308)
($16308)/$200,000 = -8.15%
Part 4 Net Present Value
Before Tax After tax 10% PV Present
Item Year Amount Tax % Amount Factor Value
Cost of machine 0 $(200,000) $(200,000)
Annual cash savings 1 through 5 $19,920 0.65 $12,948
Tax savings due to depreciation 1 through 5 $32,000 0.35 $11,200
Disposal value 5 $40,000 $40,000
Net Present Value
Part 5 Internal Rate of Return
Excel Function method to calculate IRR
This function REQUIRES that you have only one cash flow per period (period 0 through period 5 for our example)
This means that no annuity figures can be used. The chart for our example can be revised as follows:
After Tax
Item Year Amount
Cost of machine and training 0
Year 1 inflow 1
Year 2 inflow 2
Year 3 inflow 3
Year 4 inflow 4
Year 5 inflow 5
The IRR function will require the range of cash flows beginning with the initial cash outflow for the investment
and progressing through each year of the project. You also have to include an initial "guess" for the
possible IRR.
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