ACCT505

Course Project Part B

Capital Budgeting problem

La'Kita Micy
Clark Paint

Data:
Cost of new equipment
Expected life of equipment in years
Disposal value in 5 years
Life production - number of cans
Annual production or purchase needs
Initial training costs
Number of workers needed
Annual hours to be worked per employee
Earnings per hour for employees
Annual health benefits per employee
Other annual benefits per employee-% of wages
Cost of raw materials per can
Other variable production costs per can
Costs to purchase cans - per can
Required rate of return
Tax rate

$200,000
5
$40,000
5,500,000
1,100,000
0
3
2,000
$12.00
$2,500
18%
$0.25
$0.05
$0.45
12%
35%

Make
Cost to produce
Annual cost of direct material:
Need of 1,000,000 cans per year
Annual cost of direct labor for new employees:
Wages
Health benefits

Purchase

$200,000
58,650
4,500

Other benefits
Total wages and benefits
Other variable production costs
Total annual production costs
Annual cost to purchase cans

10,557
73,707
100,000
$373,707
$500,000

Part 1 Cash flows over the life of the project

Item
Annual cash savings
Tax savings due to depreciation

Before Tax
Amount

Tax
Effect
$126,293
32,000

After Tax
Amount
0.65
$82,090
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
Less Depreciation
Before tax income
Tax at 35% rate
After tax income

$126,293
32,000
94,293
33,003
$61,290

$61,290/$200,000 =

30.65%

Part 4 Net Present Value

Item
Cost of machine

Before Tax
Amount

Year
0

Tax %
-$200,000

After tax
Amount
-$200,000

Cost of training
Annual cash savings
Tax savings due to depreciation
Disposal value
Net Present Value

0
1-5
1-5
5

0
$126,293
$32,000
$40,000

0.65
0.35

0
82,090
11,200
40,000

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 fo
This means that no annuity figures can be used. The chart for our example can be revised as follows

Item
Year
Cost of machine and training
Year 1 inflow
Year 2 inflow
Year 3 inflow
Year 4 inflow
Year 5 inflow

After Tax
Amount
0 ($200,000)
1 $ 93,290
2 $ 93,290
3 $ 93,290
4 $ 93,290
5 $ 133,290

The IRR function will require the range of cash flows beginning with the initial cash outflow for the
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%

10% PV Present
Factor Value
1.000 -$200,000

1.000
3.791
3.791
0.621

0
311,205
42,459
24,840
$178,504

(period 0 through period 5 for our example)

ple can be revised as follows:

he initial cash outflow for the investment

de an initial "guess" for the