Ac505 Project 2

Cost of new equipment $200,000 Expected life of equipment in years5 years Disposal value in 5 years $40,000 Life production – number of cans 5,500,000 Annual production or purchase needs 1,100,000 Number of workers needed3 Annual hours to be worked per employee2000hours Earnings per hour for employees $12. 00 Annual health benefits per employee $2,500 Other annual benefits per employee-% of wages18% Cost of raw materials per can $0. 25 Other variable production costs per can $0. 05 Costs to purchase cans – per can $0. 45 Required rate of return12% Tax rate35% MakePurchase Need of 1,100,000 cans per year *. 5 $275,000 Variable production costs *. 05 $55,000 Wages $72,000 Health benefits $7,500 Other benefits $12,960 Total wages and benefits $92,460 $422,460 $495,000 (72540) Before TaxTax EffectAfter Tax ItemAmount Amount Annual cash savings (make vs buy) $72,540 0. 65 $47,151 * Tax effect on Annual Cash Savings is 1 – tax rate Tax savings due to depreciation $32,000 0. 35 $11,200 * Tax effect on Depreciation is the tax rate Total annual cash flow $58,351. 00 Initial investment/ Annual Cash Saving $200,000/ $58351=3. 4 years Annual cash savings (before tax effect) $72,540 Less Depreciation $(32,000)

Before tax income $40,540 Tax at 35% rate $(14,189) After tax income $26,351 $ 26,351 / 200,00013. 18% Before TaxAfter tax12% PVPresent ItemYearAmountTax %AmountFactorValue Cost of machine0 $(200,000) $(200,000)1(200,000) Annual cash savings1-5 $72,540 0. 65 $47,151 3. 605169,979 Tax savings due to depreciation1-5 $32,000 0. 35 $11,200 3. 60540,376 Disposal value5 $40,000 $40,000 0. 56722,680 Net Present Value33,035 After Tax ItemYearAmount Cost of machine0 $(200,000) Year 1 inflow1 $58,351 Year 2 inflow2 $58,351 Year 3 inflow3 $58,351 Year 4 inflow4 $58,351 Year 5 inflow5 $98,351 IRR FunctionIRR(F78.. F83,. 30)18. 0%

October 19, 2017