2. PROJECT EVALUATION (24 MARKS) Rundle Company manufactures three different models of paper shredders including the waste container, which serves as the base. Although each model uses a different shredder head, the waste container is the same. The number of waste containers that Rundle will need during the next five years is estimated as follows: 2018 - 50,000 2019 - 50,000 2020 - 52,000 2021 - 55,000 2022 - 55,000 The equipment used to manufacture the waste container must be replaced because it has broken and cannot be repaired. The new equipment would have a purchase price of $945,000 with terms of 2/10, n/30; company policy is to take all purchase discounts. The equipment would be purchased on December 31, 2017 and be placed into service on January 1, 2018. It would have a five-year economic life. This equipment is expected to have a salvage value of $12,000 at the end of its economic life in 2022. The new equipment would be more efficient than the old equipment, resulting in a 25% reduction in both direct materials and variable overhead. The savings in direct materials would result in an additional one-time decrease in working capital requirements of $2,500 due to a reduction in direct materials inventories. This working capital reduction would be recognized at the time of equipment acquisition. The old equipment is fully depreciated and is not included in the fixed overhead. The old equipment from the plant can be sold for a salvage amount of $1,500. Rather than replace the equipment, one of Rundle's production managers has suggested that the waste containers be purchased. One supplier has quoted a price of $27 per container. This price is $8 less than Rundle's current manufacturing cost per unit, which is as follows: Variable Costs: Direct materials Direct labor Variable overhead Fixed overhead: Supervision Facilities General Total manufacturing cost per unit Rundle employs a plant-wide fixed overhead rate in its operations. If the waste containers are purchased outside, the salary and benefits of one supervisor of $45,000, included in the fixed overhead, would be eliminated. There would be no other changes in the other cash and non-cash items included in fixed overhead, except depreciation on the new equipment. Rundle is subject to a 40% income tax rate. Management assumes that all annual cash flows and tax payments occur at the end of the year. A 12% after tax discount rate is used. Required 1. Rundle Company must decide whether to purchase the waste containers from an outside supplier or to purchase the equipment and manufacture the waste containers. Calculate the NPV of the estimated after-tax cash inflows at December 31, 2017, and determine which of these two options to pursue. Assume that the equipment is a class 8 asset. 20%, the equipment is the only asset in the class and that the equipment (if purchased) would be disposed of on January 1, 2023 when the Undepreciated Capital Cost in class 8 is $340,844. (22 marks)