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##### DEVRY ACCT505 course project B

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**Question**

Question;Capital BudgetiCapital Budgeting Decision;These instructions can also be;downloaded from DocSharing!!;Due by Tuesday of week 8, midnight, Mountain;Time;Here is;Part B;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;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? per can 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 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;Annual cash flows over the;expected life of the equipment;Payback period;Annual rate of return;Net present value;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.;ACCT505;Part B;Capital Budgeting problem;CLARK PAINTS;Data;Cost of new equipment;$2,00,000;Expected life of equipment in years;5;Disposal value in 5 years;$40,000;Life production - number of cans;55,00,000;Annual production or purchase needs;11,00,000;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%;Make;Purchase;Cost to;produce;Annual cost of direct material;Need of 1,000,000 cans per year;Annual cost of direct labor for new;employees;Wages;Health benefits;Other benefits;Total wages and benefits;0;Other variable production costs;Total annual production costs;0;Annual cost to purchase cans;Part;1 Cash flows over the life of the project;Before Tax;Tax;After Tax;Item;Effect;Amount;Annual cash savings;0.65;$0;Tax savings due to depreciation;0.35;$0;Total annual cash flow;$0;Part;2 Payback Period;years;Part;3 Annual rate of return;Accounting income as result of;decreased costs;Annual cash savings;Less Depreciation;Before tax income;0;Tax at 35% rate;After tax income;$0;Part;4 Net Present Value;Before Tax;After tax;10% PV;Present;Item;Year;Amount;Tax %;Amount;Factor;Value;Cost of machine;0;$0;$0;Cost of training;0;0;$0;Annual cash savings;1-5;0.65;-;$0;Tax savings due to depreciation;1-5;0.35;-;$0;Disposal value;5;0;$0;Net Present Value;$0;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. The formula is: =IRR(values,guess);IRR Function;IRR(f84..f89,.30);#NUM!;="msonormal">

Paper#40735 | Written in 18-Jul-2015

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