Hampton
Company: The production department has been investigating possible ways to
Capital
Budgeting Decision
Project 2:
Hampton
Company: The production department has been investigating possible ways to trim
total production costs. One possibility currently being examined is to make the
cans instead of purchasing them. The equipment needed would cost $1,000,000,
with a disposal value of $200,000, and would be able to produce 27,500,000 cans
over the life of the machinery. The production department estimates that
approximately 5,500,000 cans would be needed for each of the next 5
years.
The
company would hire six new employees. These six individuals would be full-time
employees working 2,000 hours per year and earning $15.00 per hour. They would
also receive the same benefits as other production employees, 15% of wages in
addition to $2,000 of health benefits.
It is
estimated that the raw materials will cost 30¢ per can and that other variable
costs would be 10¢ 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 50¢ each if purchased from the current supplier.
The company's minimum rate of return (hurdle rate) has been determined to be 11%
for all new projects, and the current tax rate of 35% is anticipated to remain
unchanged. The pricing for the company’s products 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
Simple rate of return
Net present value
Internal rate of return
The check figure for the total annual after-tax cash flows is $271,150.
2. Would
you recommend the acceptance of this proposal? Why or why not? Prepare a short,
double-spaced paper in MS Word elaborating on and supporting your
answer.
TUTORIAL
PREVIEW
|
Hampton
Company
|
|
|
Cost
of new equipment
|
$1,000,000
|
|
Expected
life of equipment in years
|
5
|
|
Disposal
value in 5 years
|
$200,000
|
|
Life
production - number of cans
|
27,500,000
|
