AC505-Managerial Accounting Project BClark Paint Capital Budgeting ProblemData:
Cost of new equipment200,000$Expected life of equipment in years5Disposal value in 5 years40,000$Life production - number of cans5,500,000 Annual production or purchase needs1,100,000 Initial training costsNumber of workers needed3Annual hours to be worked per employee2000Earnings per hour for employees12.00$Annual health benefits per employee2,500$Other annual benefits per employee-% of wages18%Cost of raw materials per can0.25$Other variable production costs per can0.05$Costs to purchase cans - per can0.45$Required rate of returnTax rate35%12%
MakePurchaseCost to Produce
Annual cost of direct material:Need of 1,1,000,000 cans per year275,000$Annual cost of direct labor for new employees:Wages72,000$Health benefits7,500$Other benefits12,960$Total wages and benefits92,460$Other variable cost:55,000$Total annual production costs422,460$Annual cost to purchase cans495,000$
Part 1 Cash Flows over the life of the projectBefore TaxTax EffectAfter Tax
ItemAmountAmountAnnual cash savings (make vs buy)72,540$ 65%47,151$ * Tax effect on Annual Cash Savings is 1 - tax ratTax savings due to depreciation32,000$ 35%11,200$ * Tax effect on Depreciation is the tax rate
Total annual cash flow
104,540$
58,351.00$Part 2 Payback Period
($200,000)/ $87,690 =
3.4yearsPart 3 Annual Rate of Return
Accounting income as result of decreased costsAnnual cash savings (before tax effect)104,540$Less Depreciation(32,000)$Before tax income72,540$Tax at 35% rate25,389$After tax income47,151$$82,901/$200,000 =
23.58%

Part 4 Net Present Value
Before TaxAfter tax12% PVPresentItemYearAmountTax %AmountFactorValueCost of machine0(200,000)$ (200,000)$ 1(200,000)$Cost of training0-$ -$ 1-$Annual cash savings1-572,540$ 65%47,151$ 3.605169,979$Tax savings due to depreciation1-532,000$ 35%11,200$