SolutionACCT505Part BCapital Budgeting problemClark PaintsData:Cost of new equipment$200,000Expected life of equipment in years5Disposal value in 5 years$40,000Life production - number of cans5,500,000Annual production or purchase needs1,100,000Initial training costs0Number of workers needed3Annual hours to be worked per employee2,000Earnings per hour for employees$12.00Annual health benefits per employee$2,500Other annual benefits per employee-% of wages18%Cost of raw materials per can$0.25Other variable production costs per can$0.05Costs to purchase cans - per can$0.45Required rate of return12%Tax rate35%MakePurchaseCost to produceAnnual cost of direct material:Need of 1,100,000 cans per year$275,000Annual cost of direct labor for new employees:Wages72,000Health benefits7,500Other benefits12,960Total wages and benefits92,460Other variable production costs55,000Total annual production costs$422,460Annual cost to purchase cans$495,000Part 1 Cash flows over the life of the projectBefore TaxTaxAfter TaxItemAmountEffectAmountAnnual cash savings$72,5400.65$47,151Tax savings due to depreciation32,0000.35$11,200Total annual cash flow$104,540$58,351Part 2 Payback Period$200,000 / $58351 =3.43yearsPart 3 Annual rate of returnAccounting income as result of decreased costsAnnual cash savings$72,540Less Depreciation32,000Before tax income40,540Tax at 35% rate14,189After tax income$26,351$26,351/$200,000 =13.18%Part 4 Net Present ValueBefore TaxAfter tax12% PVPresentItemYearAmountTax %AmountFactorValueCost of machine0-$200,000-$200,0001.000-$200,000Cost of training0001.0000Annual cash savings1-5$72,5400.6547,1513.61170,215Tax savings due to depreciation1-5$32,0000.3511,2003.6140,432Disposal value5$40,00040,0000.5722,800Net Present Value$33,447Part 5 Internal Rate of ReturnExcel Function method to calculate IRRThis function REQUIRES that you have only one cash flow per period (period 0 through period 5 for our example)This means that no annuity figures can be used. The chart for our example can be revised as follows:After TaxItemYearAmountCost of machine and training0$(200,000)Year 1 inflow1$58,351Year 2 inflow2$58,351Year 3 inflow3$58,351Year 4 inflow4$58,351Year 5 inflow5$98,351The IRR function will require the range of cash flows beginning with the initial cash outflow for the investmentand progressing through each year of the project. You also have to include an initial "guess" for thepossible IRR. The formula is: =IRR(values,guess)IRR FunctionIRR(f84..f89,.30)18.0%