CapitalBudgeting Decision

Here is Project 2:

Company: The production department hasbeen investigating possible ways to trim total production costs. Onepossibility currently being examined is to make the cans instead of purchasingthem. 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 beneeded for each of the next 5 years.

The company would hire six newemployees. These six individuals would be full-time employees working 2,000hours per year and earning $15.00 per hour. They would also receive the samebenefits as other production employees, 15% of wages in addition to $2,000 ofhealth benefits.

It is estimated that the raw materialswill cost 30 per can and that other variable costs would be 10 per can. Becausethere is currently unused space in the factory, no additional fixed costs wouldbe incurred if this proposal is accepted.

It is expected that cans would cost 50each if purchased from the current supplier. The company's minimum rate ofreturn (hurdle rate) has been determined to be 11% for all new projects, andthe current tax rate of 35% is anticipated to remain unchanged. The pricing forthe companys products as well as number of units sold will not be affected bythis decision. The unit-of-production depreciation method would be used if thenew equipment is purchased.

Required:

1. Based on the above information andusing Excel, calculate thefollowing 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 annualafter-tax cash flows is $271,150.