[s.karanpal]

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 it 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¢ each 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 the 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.

Required:
1. Based on the above information and using Excel, calculate the following items for this proposed equipment purchase:
o Annual cash flows over the expected life of the equipment
o Payback period
o Annual rate of return
o Net present value
o Internal rate of return


2. Would you recommend the acceptance of this proposal? Why or why not? Prepare a short double-spaced Word paper elaborating and supporting your answer.

[JudyKayTee]

Sorry, I'm too busy to prepare your "short" doubled spaced paper right now.

Please refer to this AMHD announcement:

“Do not simply retype or paste a question from your book or study material

We won't do your homework questions for you. You were given the assignment for you to learn.

If you come up with your own answer and post it for us to critique that is within reason.

If you have some SPECIFIC questions that you couldn't find or didn't understand, we may help with that.

But this is your assignment, so show us you have at least attempted to complete it on your own.

Thank you.”

[s.karanpal]

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.