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Clark Paints, Inc.

Cost of new equipment


Expected life of equipment in years
Disposal value in 5 years
Life production - number 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 cans - per can
Required rate of return
Tax rate

Cost to produce
Annual cost of direct material:
Need of 1,000,000 cans per year (Including Variable Cost
Annual cost of direct labor for new employees:
Wages
Health benefits
Other benefits
Total wages and benefits
Total annual production costs
Annual cost to purchase cans

Part 1 Cash flows over the life of the project


Item
Annual cash savings (make vs buy)
Tax savings due to depreciation
Total annual cash flow

Part 2 Payback Period

Part 3 Annual rate of return


Accounting income as result of decreased costs
Annual cash savings (before tax effect)
Less Depreciation
Before tax income
Tax at 35% rate
After tax income
39390/(150000+12000)
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
Part 5 Internal Rate of Return

Item
Cost of machine and training
Year 1 inflow
Year 2 inflow
Year 3 inflow
Year 4 inflow
Year 5 inflow

IRR

$
$

$
$
$
$
$

200,000
5
40,000
5,500,000
1,100,000
15,000
3
2,000
12.00
2,500
18%
0.25
0.05
0.45
12%
35%

Make

Purchase

330,000

$
$
$
$

72,000
7,500
12,960
92,460

422,460
495,000

Before Tax
Amount
$
$

Tax Effect
72,540
32,000

After Tax
Amount
65.00% $
47,151
35% $
11,200
###

(200000+12000)/61390years

3.7

* Tax effect on Annual Cash Savings is 1 * Tax effect on Depreciation is the tax rate

$
$
$
$
$

72,540
(32,000)
40,540
14,189
26,351
16.27%

Year
0
0
1-5
1-5
5

Before Tax
Amount
Tax %
$
(200,000)
$
(15,000)
$
72,540
$
32,000
$
40,000

After tax
Amount
###
$ (15,000)
65% $ 47,151
35% $ 11,200
$ 40,000

PV 12%
Factor
1
1
3.60478
3.60478
0.5674

Present
Value
###
$ (15,000)
$ 169,969
$ 40,374
$ 22,696
$ 18,039

Year

After Tax
Amount
$
(215,000)
$
58,351
$
58,351
$
58,351
$
58,351
$
98,351

15%

on Annual Cash Savings is 1 - tax rate


on Depreciation is the tax rate