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devry fin 505 Johnnie & Sons Paints, Inc. Capital Budgeting Decision SAMPLE PROJECT




Question;Johnnie & Sons Paints, Inc.;Capital Budgeting Decision;SAMPLE PROJECT;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 5,000,000 cans over;the life of the machinery. The production department estimates that;approximately 1,000,000 cans would be needed for each of the next five year.;These;three individuals would be full-time employees working 2,300 hours per year and;earning $8.50 per hour. They would also receive the same benefits as other;production employees, 18% of wages in addition to $1,500 of health benefits.;It is;estimated that the raw materials will cost 20? per can and that other variable;costs would be 10? 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 50? per can if purchased from the current;supplier. The company's minimum rate of return (hurdle rate) has been;determined to be 10% 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.;?;Based on the above information and using Excel, calculate the following items;for this proposed equipment purchase;1. Annual;cash flows over the expected life of the equipment;2. Payback;period;3. Annual;rate of return;4. Net;present value;5.;Internal rate of return;?;Would you recommend the acceptance of this proposal?;Why or why not?


Paper#50589 | Written in 18-Jul-2015

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