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ACCT 505 Course Project 2 Hampton Company
Capital Budgeting Decision
Hampton Company: The production department has been investigating
possible ways to trim total production costs. One possibility currently
being examined is to make the cans instead of purchasing them. The
equipment needed would cost $1,000,000, with a disposal value of
$200,000, and would be able to produce 27,500,000 cans over the life of
the machinery. The production department estimates that approximately
5,500,000 cans would be needed for each of the next 5 years.
The company would hire six new employees. These six individuals
would be full-time employees working 2,000 hours per year and earning
$15.00 per hour. They would also receive the same benefits as other
production employees, 15% of wages in addition to $2,000 of health
benefits.
It is estimated that the raw materials will cost 30¢ per can and that other
variable costs would be 10¢ per can. Because 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 50¢ each if purchased from the
current supplier. The company’s minimum rate of return (hurdle rate)
has been determined to be 11% for all new projects, and the current tax
rate of 35% is anticipated to remain unchanged. The pricing for the
company’s products 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.
o Annual cash flows over the expected life of the equipment
o Payback period
o Simple rate of return