HAMPTON COMPANY

Our academic experts are ready and waiting to assist with any writing project you may have. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs.

GET A 40% DISCOUNT ON YOU FIRST ORDER

ORDER NOW DISCOUNT CODE >>>> WELCOME40

HAMPTON COMPANY
Cost of new equipment $1,000,000
Expected life of equipment in years 5
Disposal value in 5 years $200,000
Life production – number of cans 27,500,000
Annual production or purchase needs 5,500,000
Initial training costs
Number of workers needed 6
Annual hours to be worked per employee 2,000
Earnings per hour for employees $15.00
Annual health benefits per employee $2,000
Other annual benefits per employee-% of wages 15%
Cost of raw materials per can $0.30
Other variable production costs per can $0.10
Costs to purchase cans – per can $0.50
Required rate of return 11%
Tax rate 35%
Make Purchase
Cost to produce
Annual cost of direct material:
Need of 5,500,000 cans per year (Including Variable Cost) $2,200,000
Annual cost of direct labor for new employees:
Wages $180,000
Health benefits $12,000
Other benefits $27,000
Total wages and benefits $219,000
Total annual production costs $2,419,000
Annual cost to purchase cans 2,750,000
Part 1 Cash flows over the life of the project
Before Tax Tax Effect After Tax
Item Amount Amount
Annual cash savings (make vs buy) $331,000 65.00% $215,150 * Tax effect on Annual Cash Savings is 1 – tax rate
Tax savings due to depreciation $160,000 35% $56,000 * Tax effect on Depreciation is the tax rate
Total annual cash flow $271,150.00
Part 2 Payback Period
1,000,000/271,150 years 3.7
Part 3 Annual rate of return
Accounting income as result of decreased costs
Annual cash savings (before tax effect) $331,000
Less Depreciation $(160,000)
Before tax income $171,000
Tax at 35% rate $59,850
After tax income $111,150
Annua rate of return 13.89%
Part 4 Net Present Value
Before Tax After tax PV 11% Present
Item Year Amount Tax % Amount Factor Value
Cost of machine 0 $(1,000,000) $(1,000,000) 1 $(1,000,000)
Cost of training 0 $- $- 1 $-
Annual cash savings 1-5 $331,000 65% $215,150 3.6959 $795,173
Tax savings due to depreciation 1-5 $160,000 35% $56,000 3.6959 $206,970
Disposal value 5 $200,000 $200,000 0.5935 $118,700
Net Present Value $120,843
Part 5 Internal Rate of Return
After Tax
Item Year Amount
Cost of machine and training $(1,000,000)
Year 1 inflow $271,150
Year 2 inflow $271,150
Year 3 inflow $271,150
Year 4 inflow $271,150
Year 5 inflow $471,150
IRR 15%
ACCT505
Project 2
Sample Capital Budgeting Problem Solution
This file can be used as the template for the actual project.
Johnnie & Sons Paints Inc.
Data:
Cost of new equipment $200,000
Expected life of equipment in years 5
Disposal value in 5 years $40,000
Life production—number of cans 5,000,000
Annual production or purchase needs 1,000,000
Initial training costs 0
Number of workers needed 3
Annual hours to be worked per employee 2,300
Earnings per hour for employees $8.50
Annual health benefits per employee $1,500
Other annual benefits per employee—% of wages 18%
Cost of raw materials per can $0.20
Other variable production costs per can $0.10
Costs to purchase cans—per can $0.50
Required rate of return 10%
Tax rate 35%
Make Purchase
Cost to Produce
Annual cost of direct material:
Need of 1 million cans per year $200,000
Annual cost of direct labor for new employees:
Wages 58,650
Health benefits 4,500
Other benefits 10,557
Total wages and benefits 73,707
Other variable production costs 100,000
Total annual production costs $373,707
Annual cost to purchase cans $500,000
Part 1 Cash Flows Over the Life of the Project
Before Tax Tax After Tax
Item Amount Effect Amount
Annual cash savings $126,293 0.65 $82,090
Tax savings due to depreciation 32,000 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 $126,293
Less depreciation 32,000
Before tax income 94,293
Tax at 35% rate 33,003
After tax income $61,290
$61,290 / $200,000 = 30.65%
Part 4 Net Present Value
Before Tax After Tax 10% PV Present
Item Year Amount Tax % Amount Factor Value
Cost of machine 0 -$200,000 -$200,000 1.000 -$200,000
Cost of training 0 0 0 1.000 0
Annual cash savings 1-5 $126,293 0.65 82,090 3.791 311,205
Tax savings due to depreciation 1-5 $32,000 0.35 11,200 3.791 42,459
Disposal value 5 $40,000 40,000 0.621 24,840
Net Present Value $178,504
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, for our example).
This means that no annuity figures can be used. The chart for our example can be revised as follows.
After Tax
Item Year Amount
Cost of machine and training 0 $(200,000)
Year 1 inflow 1 $93,290
Year 2 inflow 2 $93,290
Year 3 inflow 3 $93,290
Year 4 inflow 4 $93,290
Year 5 inflow 5 $133,290
The IRR function will require the range of cash flows, beginning with the initial cash outflow for the investment
and progressing through each year of the project. You also have to include an initial guess for the
possible IRR. The formula is: =IRR(values,guess)
IRR Function IRR(f84..f89,.30) 39.2%

Our academic experts are ready and waiting to assist with any writing project you may have. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs.

GET A 40% DISCOUNT ON YOU FIRST ORDER

ORDER NOW DISCOUNT CODE >>>> WELCOME40

 

 

Posted in Uncategorized