Sylvia Oriol Part B Clark Paints - Capital Budgeting problem Data: Cost of new equipment Expected life of equipment

in years Disposal value in 5 years Life production - number of cans Annual production or purchase needs Number of workers needed Annual hours to be worked per employee Earnings per hour for employees Annual health benefits per employee Other annual benefits per employee-% of wages Cost of raw materials per can Other variable production costs per can Costs to purchase cans - per can Required rate of return Tax rate Cost to produce Annual cost of direct material: Need of 1,100,000 cans per year Annual cost of direct labor for new employees: Wages Health benefits Other benefits Total wages and benefits Other variable production costs Total annual production costs Annual cost to purchase cans
Part 1 Cash flows over the life of the project Before Tax Amount $72,540 32,000

$200,000 5 $40,000 5,500,000 1,100,000 3 2,000 $12 $2,500 18% $0.25 $0.05 $0.45 12% 35% Make
$ $ $ $ $ $ $ 275,000 72,000 7,500 12,960 92,460 55,000 422,460

Annual cash savings Tax savings due to depreciation

Total annual cash flow Part 2 Payback Period

3.43 Part 3 Annual rate of return

Accounting income as result of decreased costs Annual cash savings (before tax effect) Less Depreciation Before tax income Tax at 35% rate After tax income

$ $ $ $ $

72,540 32,000 40,540 14,189 26,351 13.18%

Part 4 Net Present Value Item Year

Cost of machine Annual cash savings Tax savings due to depreciation Disposal value Net Present Value

0 1-5 1-5 5

Part 5 Internal Rate of Return Cash flows:

Excel Function method to calculate Year

Cost of machine Year 1 inflow Year 2 inflow Year 3 inflow Year 4 inflow Year 5 inflow

0 1 0 0 0 0

Purchase

$ 495,000

Tax impact

After Tax Amount

0.65 0.35

$47,151
$11,200 $58,351

years

Before Tax Amount

Tax %

After tax Amount

Factor

Present Value

$ $ $

($200,000) 72,540 32,000 40,000

($200,000) 0.65 $ 47,151 0.35 $ 11,200 $ 40,000

1 3.60478 3.60478 0.56743

$ (200,000) $ 169,969 $ 40,374 $ 22,697

$33,040

xcel Function method to calculate IRR Total

$ (200,000) $ 58,351 $ 58,351 $ 58,351 $ 58,351 $ 98,351 18.0%