[likeus2]

Ask Help Desk- Here is the problem...
Clark Paints: The production department has been investigating possible ways to trim total production costs. One possibility currently being examined is to make the paint cans instead of purchasing them. The equipment needed would cost $200,000 with a disposal value of $40,000 and would be able to produce 5,500,000 cans over the life of the machinery. The production department estimates that approximately 1,100,000 cans would be needed for each of the next five years.
The company would hire three new employees. These three individuals would be full-time employees working 2,000 hours per year and earning $12.00 per hour. They would also receive the same benefits as other production employees, 18% of wages in addition to $2,500 of health benefits.
It is estimated that the raw materials will cost 25¢ per can and that other variable costs would be 5¢ per can. Since there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted.
It is expected that cans would cost 45¢ per can if purchased from the current supplier. The company's minimum rate of return (hurdle rate) has been determined to be 12% for all new projects, and the current tax rate of 35% is anticipated to remain unchanged. The pricing for a gallon of paint as well as number of units sold will not be affected by this decision. The unit-of-production depreciation method would be used if the new equipment is purchased.

Here is what I have but the instructor has noted that the total annual cash flow (after tax amount) is $58,351
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 1,000,000 cans per year $200,000
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 $347,460

Annual cost to purchase cans $660,000


Part 1 Cash flows over the life of the project
Before Tax Tax After Tax
Item Amount Effect Amount
Annual cash savings $312,540 0.65 $164,151
Tax savings due to depreciation 32,000 0.35 $11,200

Total annual cash flow $175,351

Can someone advise me?
Thank you.

[pready]

The cost to make purchase is your annual production or purchase needs times your costs to purchase cans per can.

The cost to produce the cans contains 4 things:
1. The annual cost of direct materials which is your annual production or purchase needs times the sum of your raw material per can and your other variable production costs per can.

2. Wages of your employees which is your number of employees needed times annual hours per employee times your earnings per hour per employee.

3. Health benefits for your employees which is your number of employees times your annual health benefits per employee.

4. Other benefits of your employees which is the number of employees times annual hours worked per employee times earnings per hour per employee times your annual other benefits per employees % of wages.

The cash flows over the life of the project:
For Before Taxes amount cash savings of make vs buy is your annual costs to purchase cans minus your total annual production costs. For your after tax effect take your before tax amount times the sum of 1 minus your tax rate.

For the tax savings due to depreciation:
For the before taxes amount take your cost of new equipment minus your salvage value divided by your life of production number of cans times your annual production or purchase needs. For after tax amount take your before tax amount times your take rate.

[likeus2]

Is this how it should look for Cost to produce section

Annual cost of direct material: Need of 1,100,000 per year
1,100,000*(.25+.05) =$330,000

Annual cost of direct labor for new employees
Wages 12*2000*3 = 72,000
Health benefits 2500*3 = 7,500
Other benefits=12,960
Total wages and benefits = $92,460

Other variable production costs = 55,000 (1100000*0.05)
Total annual production costs = $477,460 (330,000+92,460+55,000)
Annual cost to purchase cans = $660,000 (5,500,000*.12)

Before proceeding to Cash Flow over the life of the project I wanted to see if I have updated correctly, first.
Thank you.

[pready]

The other variable production costs are included in the annual production direct costs. $0.25 cost of raw materials per can + $0.05 other variable production cost per can. Your total annual production costs should be $422,460.

Your annual cost to purchase cans should be your annual production or purchase needs of 1,100,000 times your costs to purchase cans - per can of $0.45 equals $495,000.