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Course Project B - AC505

# Course Project B - AC505 - PROJECT B Capital Budgeting...

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PROJECT B - Capital Budgeting Decision Student Name: Required: o Annual cash flows over the expected life of the equipment o Payback period o Annual rate of return o Net present value o Internal rate of return Facts: Equipment 200000 Unit 11000000 Salvage 40000 Life 5 DL 12 DL hours 2000 Benefits 6820 Materials 0.25 Variable 0.05 Buying price 0.45 Hurdle rate 12% Tax rate 35% Annual cash flows over the expected life of the equipment INITIAL CASH OUTFLOWS Initial Investments Equipment Purchase Price = 200000 YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 Buying Price 495000 495000 495000 495000 495000 Less: direct materials 275000 275000 275000 275000 275000 Less: Variable costs 55000 55000 55000 55000 55000 Less: direct labor 72000 72000 72000 72000 72000 Less: fringe benefits 15460 15460 15460 15460 15460 Cash flow from operations 77540 77540 77540 77540 77540 Less: Depreciation* 32000 32000 32000 32000 32000 Taxable income 45540 45540 45540 45540 45540 Less: taxes (35%) 15939 15939 15939 15939 15939 Net Income 29601 29601 29601 29601 29601 Net cash flow -200000 61601 61601 61601 61601 61601 Unrecovered Investment -200000 -138399 -76798 -15197 0 0 *Depreciation Rate per unit= ( Cost of the equipment - Disposal value) / Unit = 0.0291 per unit 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. 1. Based on the above information and using Excel, calculate the following items for this porposed equipment purchase: The company would hire three new employees. These three individuals would be full-time employees working

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Course Project B - AC505 - PROJECT B Capital Budgeting...

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