Clark Paints: The production department has been investigating possible ways to trim total production

needed would cost $200,000, with a disposal value of $40,000, and it would be able to produce 5,500
needed for each of the next five years.
The company would hire three new employees. These three individuals would be full-time employees
employees, 18% of wages, in addition to $2,500 of health benefits.

It is estimated that the raw materials will cost 25 per can and that other variable costs would be 5 p
accepted.

It is expected that cans would cost 45 each if purchased from the current supplier. The company's m
anticipated to remain unchanged. The pricing for a gallon of paint, as well as the number of units sold
purchased.

Required:
1. Based on the above information and using Excel, calculate the following items for this proposed eq
o Annual cash flows over the expected life of the equipment
o Payback period
o Annual rate of return
o Net present value
o Internal rate of return

2. Would you recommend the acceptance of this proposal? Why or why not? Prepare a short double-spaced Word paper elab

1
Depreciation = 200,000 - 40,000 x 1,100,000
5,500,000
32000
Salary and other benefits = 2,000 x 12 + (2,000 x 12 ) x 18% + 2,500 =

Cost if machinery is purchased cans are m

Cost if
purchased
(@45c)

Year

0
1
2
3
4
5

Year

Investment cost

Depreciation

Salary and other Raw material

benefits
(@25c)

200,000
495,000
495,000
495,000
495,000
495,000

Annual cash
flows

32,000
32,000
32,000
32,000
32,000

Cummulative cash
flows

30,820
30,820
30,820
30,820
30,820

275,000
275,000
275,000
275,000
275,000

0
1
2
3
4
5

-200,000
66,417
66,417
66,417
66,417
92,417

Average
cash flows
=

66,417
132,834
199,251

265,668
358,085

71,617

Payback period = 3 + (200,000-199,251)

66,417
=
3.011 years
Annual rate of return = Average annual cash flows/Investment
= 71,617/200,000
35.81%
OR
Annual rate of return = Average annual cash flows/Average Investment
= 71,617/(162,000)/2
71.62%

Net present value & Internal rate of return

Annual cash
flows

Year

0
1
2
3
4
5

-200,000
66,417
66,417
66,417
66,417
92,417
NPV =
IRR =

PV@12%
($200,000.00)
$59,300.89
$52,947.23
$47,274.31
$42,209.20
$52,439.89
$54,171.52
22%

2
The project should be accepted based on the aceept-reject rules of NPV and IRR.
If NPV is positive then the project should be accepted as the present value of future cash inflows are g
Thus the project can be accepted. Also if IRR is greater than the cost of capital the project can be proj
Thus the project based on IRR also should be accepted.

o trim total production costs. One possibility currently being examined is to make the paint cans instead of purch
able to produce 5,500,000 cans over the life of the machinery. The production department estimates that approx

e full-time employees working 2,000 hours per year and earning $12.00 per hour. They would also receive the sa

le costs would be 5 per can. Since there is currently unused space in the factory, no additional fixed costs wou

ier. The company's minimum rate of return (hurdle rate) has been determined to be 12% for all new projects, an
e number of units sold, will not be affected by this decision. The unit-of-production depreciation method would b

s for this proposed equipment purchase:

le-spaced Word paper elaborating and supporting your answer.

30820

is purchased cans are manufactured

Other variable
costs(@5c)

55,000
55,000
55,000
55,000
55,000

Total costs

200,000
392,820
392,820
392,820
392,820
392,820

Savings in costs
Savings in costs after tax

-200,000
102,180
102,180
102,180
102,180
102,180

66,417
66,417
66,417
66,417
66,417

Salvage value
after tax

26000

ure cash inflows are greater than the investment cost. Clark paints has a positive NPV of $54,171.52.
he project can be project can be accepted. Clark paints has an IRR of 22% and its cost of capital is 12%.

cans instead of purchasing them. The equipment

stimates that approximately 1,100,000 cans would be

d also receive the same benefits as other production

onal fixed costs would be incurred if this proposal is

r all new projects, and the current tax rate of 35% is

ion method would be used if the new equipment is

4,171.52.
pital is 12%.