Hampton Company is a producer of house paints. The companys 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 $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 to produce the paint cans. 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

companys 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.

o

Annual cash flows over the expected life of the equipment

o

Payback period

o

Simple rate of return

o

Net present value

o

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?

Hampton Company $1 000,0DD Cot of new equipment Espected ite of equipment in years 27 500,000 Ufe producton-numer crs Annua producten or purchereeds Numper cf wokers neded Anul hours to be wofied per empiayee Canings per hour for emplovees Annua heath benerts per employe ODD $15 52 000 15% Cont of rax maorials per cm Olher var etie proouien costs per tan Costs to punchase canspercan 0.10 0 50 11% Tax ratr Need of milion cars per year wages Other hencfts sencnnnonnn Part 1 Gash Flows Over the Lite ot the Projec Part 2 Payback Parlad Pat 3 Simpla Rzca of Ratum 4 Net Present Value sposa alue Part S intemal Rate ofRetum his meane that no annuty iguscanbo used The chant for our oxam can o ubod an tolows Cost of machine and traiing Year 2 intio Year 4 intio The IRR tuncoon uil regure te range of Cish t los, begnnrg ith the nn? cash outlow for the investment progressing through each year of to pqect You ano nave to include an iitagesstr no posstie IRR The formula : ?1RRIvaues guess) IRR (284. f89..30)