The production department has been investigating possible ways to trim total production costs One possibilitycurrently being examined is to make the paint cans instead of purchasing them The equipment needed would cost $200,000 with a disposal value of $40000 and would be able to produce 5,500000 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 5g 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 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
2 Would you recommend the acceptance of this proposal? Why or why not Prepare a short double spaced Word paperelaborating and supporting your answer.