ACCT505 Capital Budgeting problem Clark Paints

Cost of new equipment $200,000
Expected life of equipment in years 5
Disposal value in 5 years $40,000
Initial working capital $0
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% Step 1: Cost of making vs. Cost of buying Make Purchase

need of 1,100,000 cans per year @ $0.25 per can $275,000 wages 72,000 health benefits 7,500 other benefits 12,960
Total wages and benefits 92,460 need of 1,100,000 cans per year @ $0.05 per can 55,000 $422,460 $495,000 $72,540 it saves to make rather than buy Before Tax Tax After Tax Amount Effect Amount
Item
Annual cash savings, after tax 72,540 65% $47,151
Tax savings due to depreciation 32000 35% 11200 Total annual cash flow 104,540 $58,351

Investment $200000
Total annual cash flow $58351
Investment / Total annual cash flow 200000/58351 3.427533376 3.4years

Annual cash savings 104,540
Less: Depreciation -32,000
Before tax income 72,540
Less:Tax at 35% rate