12 May WOULD YOU RECOMMEND THE ACCEPTANCE OF THIS PROPOSAL?
Capital Budgeting DecisionClark Paints: The production department has been investigating possible ways to trim totalproduction costs. One possibility currently being examined is to make the paint cans instead ofpurchasing 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 productiondepartment estimates that approximately 1,100,000 cans would be needed for each of the next 5years.The company would hire three new employees. These three individuals would be full-timeemployees working 2,000 hours per year and earning $12.00 per hour. They would also receivethe same benefits as other production employees, 18% of wages in addition to $2,500 of healthbenefits.It is estimated that the raw materials will cost 25¢ per can and that other variable costs would be5¢ per can. Because there is currently unused space in the factory, no additional fixed costswould be incurred if this proposal is accepted.It is expected that cans would cost 45¢ each if purchased from the current supplier. Thecompany’s minimum rate of return (hurdle rate) has been determined to be 12% for all newprojects, and the current tax rate of 35% is anticipated to remain unchanged. The pricing for agallon of paint as well as number of units sold will not be affected by this decision. The unit-ofproduction 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 thisproposed equipment purchase.oAnnual cash flows over the expected life of the equipmentoPayback periodoAnnual rate of returnoNet present valueoInternal rate of return2. Would you recommend the acceptance of this proposal? Why or why not. Prepare a shortdouble-spaced Word paper elaborating and supporting your answer.
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