Please see attachment

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?

ACCT505 Project 2 Sample Capital Budgeting Problem Solution This file can be used as the template for the assignment Johnnie & Sons Paints Inc. Data: Cost of new equipment Expected life of equipment in years Disposal value in 5 years Life productionnumber 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 cansper can Required rate of return Tax rate $200,000 5 $40,000 5,000,000 1,000,000 0 3 2,300 $8.50 $1,500 18% $0.20 $0.10 $0.50 10% 35% Make Purchase Cost to Produce Annual cost of direct material: Need of 1 million cans per year Annual cost of direct labor for new employees: Wages Health benefits Other benefits Total wages and benefits Other variable production costs $200,000 58,650 4,500 10,557 73,707 100,000 Total annual production costs Annual cost to purchase cans $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 after-tax annual cash flow $93,290 Part 2 Payback Period $200,000 / $93290 = 2.14 years Part 3 Simple 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 Cost of training Annual cash savings Tax savings due to depreciation Disposal value Net Present Value Before Tax Amount Year 0 0 1-5 1-5 5 Tax % -$200,000 0 $126,293 $32,000 $40,000 0.65 0.35 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, f This means that no annuity figures can be used. The chart for our example can be revised as fo Item Cost of machine and training Year 1 inflow Year 2 inflow Year 3 inflow Year 4 inflow Year 5 inflow Year 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 t and progressing through each year of the project. You also have to include an initial guess for th possible IRR. The formula is: =IRR(values,guess) IRR Function IRR(f84..f89,.30) 39.2% After Tax 10% PV Present Amount Factor Value -$200,000 1.000 -$200,000 0 1.000 0 82,090 3.791 311,205 11,200 3.791 42,459 40,000 0.621 24,840 $178,504 riod (Period 0 through Period 5, for our example). our example can be revised as follows. g with the initial cash outflow for the investment ve to include an initial guess for the