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Acct 505 Project B Essay

420 words - 2 pages

Part B
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
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 ...view middle of the document...

43 years

Part 3 Annual rate of return
Accounting income as result of decreased costs
Annual cash savings $72,540
Less depreciation 32,000
Before tax income 40,540
Tax at 35% rate 14,189
After tax income $26,351

$26,351 / $200,000 = 13.18%

Part 4 Net present value
Before Tax After Tax 12% PV Present
Item Year Amount Tax % Amount Factor Value
Cost of machine 0 -$200,000 -$200,000 1.000 -$200,000
Annual cash savings 1-5 72,540 0.65 47,151 3.605 169,979
Tax savings due to depreciation 1-5 $32,000 0.35 11200 3.605 40,376
Disposal value 5 $40,000 40000 0.567 22,680
Net Present Value $33,035

Part 5 Internal rate of return

Excel function method to calculate IRR

After Tax
Item Year Amount
Cost of machine and training 0 -200000
Year 1 inflow 1 58351
Year 2 inflow 2 58351
Year 3 inflow 3 58351
Year 4 inflow 4 58351
Year 5 inflow 5 98351

IRR Function IRR(f84..f89,.30) 18.0%
See accompanying document for supporting explanation.

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