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ACCT505 Part B Capital Budgeting problem Johnnie & Sons Paints, Inc. Data:

Financial Accounting project

ACCT505 Part B Capital Budgeting problem Johnnie & Sons Paints, Inc. Data: 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 5,000,000 Annual production or purchase needs 1,000,000 Initial training costs 0 Number of workers needed 3 Annual hours to be worked per employee 2,300 Earnings per hour for employees $8.50 Annual health benefits per employee $1,500 Other annual benefits per employee-% of wages 18% Cost of raw materials per can $0.20 Other variable production costs per can $0.10 Costs to purchase cans - per can $0.50 Required rate of return 10% Tax rate 35% Make Purchase Cost to produce Annual cost of direct material: Need of 1,000,000 cans per year $200,000 Annual cost of direct labor for new employees: Wages 58,650 Health benefits 4,500 Other benefits 10,557 Total wages and benefits 73,707 Other variable production costs 100,000 Total annual production costs $373,707 Annual cost to purchase cans $500,000 Part 1 Cash flows over the life of the project Before Tax Tax After Tax Item Amount Effect Amount Annual cash savings $126,293 0.65 $82,090 Tax savings due to depreciation 32,000 0.35 $11,200 Total annual cash flow $93,290 Part 2 Payback Period $200,000 / $93290 = 2.14 years Part 3 Annual rate of return Accounting income as result of decreased costs Annual cash savings $126,293 Less Depreciation 32,000 Before tax income 94,293 Tax at 35% rate 33,003 After tax income $61,290 $61,290/$200,000 = 30.65% Part 4 Net Present Value Before Tax After tax 10% PV Present Item Year Amount Tax % Amount Factor Value Cost of machine 0 -$200,000 -$200,000 1.000 -$200,000 Cost of training 0 0 0 1.000 0 Annual cash savings 1-5 $126,293 0.65 82,090 3.791 311,205 Tax savings due to depreciation 1-5 $32,000 0.35 11,200 3.791 42,459 Disposal value 5 $40,000 40,000 0.621 24,840 Net Present Value $178,504 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 $(200,000) Year 1 inflow 1 $93,290 Year 2 inflow 2 $93,290 Year 3 inflow 3 $93,290 Year 4 inflow 4 $93,290 Year 5 inflow 5 $133,290 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) 39.2%
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Solution for Requirement 2 attached... View the full answer

8413565.docx

Course project B: Clark Paints: Capital budgeting problem
2) Recommendation:
Yes. I would recommend the acceptance of this proposal.
Reasoning:
It is because, the net present value of this project...

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