Ask Experts Questions for FREE Help !
Ask
    s.karanpal's Avatar
    s.karanpal Posts: 2, Reputation: 1
    New Member
     
    #1

    Dec 9, 2011, 05:52 PM
    Clark Paints: The production department has been investigating possible ways to trim
    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's Avatar
    JudyKayTee Posts: 46,503, Reputation: 4600
    Uber Member
     
    #2

    Dec 9, 2011, 06:02 PM
    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's Avatar
    s.karanpal Posts: 2, Reputation: 1
    New Member
     
    #3

    Dec 9, 2011, 10:56 PM
    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.

Not your question? Ask your question View similar questions

 

Question Tools Search this Question
Search this Question:

Advanced Search

Add your answer here.


Check out some similar questions!

Paranornal investigating [ 1 Answers ]

I am looking to join a team in paranormal investigating. Does anyone have a team who need an extra person in their team? I am in the west midlands

How to write her ways are pleasant ways, and her paths are peace [ 0 Answers ]

I wanted to know if anyone knew how to write "her ways are pleasant ways, and her paths are peace in sanskrit?

Bi-Polar / Personality Disorder Investigating / Abrupt Behaviour [ 21 Answers ]

Hi ! I would like to introduce myself to the community and I am very happy there is a site like this this in existence. I am here to discuss the possibility of a personality disorder, perhaps bi-polar disorder. I know you can't diagnose someone with a mental disease just through a post like...

Paints [ 1 Answers ]

What is the best paint 100 Percent Acrylic Dunn Edwards or Frazee?

Investigating a Sepuence of Numbers [ 1 Answers ]

The sequences of numbers a1=1*1! a2=2*2! a3=3*3!. Find nth term of the sequence.


View more questions Search