ACCT 505 Course Project 2 Hampton Company
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
o
Net present value
o
Internal rate of
return
The check figure for
the total annual after-tax cash flows is $271,150.
2.
Would you recommend
the acceptance of this proposal? Why or why not? Prepare a short, double-spaced
paper in MS Word elaborating on and supporting your answers.
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