Capital Budgeting Decision
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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 5 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. Because 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¢ each 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.
File name: Clark Paints Inc. Project Part B.xls File type: .doc PRICE: $20
