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being examined is to make the paint cans instead of purchasing them.
The equipment needed would cost $200,000 with a disposal value of
$40,000 and would be able to produce 5,500,000 cans over the life of
the machinery. The production department estimates that
approximately 1,100,000 cans would be needed for each of the next
five years.
The company would hire three new employees. These three
individuals would be full-time employees working 2,000 hours per
year and earning $12.00 per hour. They would also receive the same
benefits as other production 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¢ per can. Since there is currently
unused space in the factory, no additional fixed costs would be
incurred if this proposal is accepted.
It is expected that cans would cost 45¢ per can if purchased from the
current supplier. The company's minimum rate of return (hurdle rate)
has been determined to be 12% for all new projects, and the current
tax rate of 35% is anticipated to remain unchanged. The pricing for a
gallon of paint as well as number of units sold will not be affected by
this decision. The unit-of-production depreciation method would be
used if the new equipment is purchased.
Required:
1. Based on the above information and using Excel, calculate the
following items for this proposed equipment purchase:
Annual cash flows over the expected life of the equipment Payback
period Annual rate of return Net present value Internal rate of return