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