Accounting Project: Calculations
Cost of new equipment $200,000 Expected life of equipment in years 5 years Disposal value in 5 years $40,000 Life production - number of cans 5,500,000 Annual production or purchase needs 1,100,000 Number of workers needed 3 Annual hours to be worked per employee 2000 hours Earnings per hour for employees $12.00 Annual health benefits per employee $2,500 Other annual benefits per employee-% of wages 18% Cost of raw materials per can $0.25 Other variable production costs per can $0.05 Costs to purchase cans - per can $0.45 Required rate of return 12% Tax rate 35% Make Purchase
Need of 1,100,000 cans per year *.25 $275,000 Variable production costs *.05 $55,000 Wages $72,000 Health benefits $7,500 Other benefits $12,960 Total wages and benefits $92,460 $422,460 $495,000 (72540)
Before Tax Tax Effect After Tax Item Amount Amount Annual cash savings (make vs buy) $72,540 0.65 $47,151 * Tax effect on Annual Cash Savings is 1 - tax rate Tax savings due to depreciation $32,000 0.35 $11,200 * Tax effect on Depreciation is the tax rate Total annual cash flow $58,351.00
Initial investment/ Annual Cash Saving $200,000/ $58351= 3.4 years
Annual cash savings (before tax effect) $72,540 Less Depreciation $(32,000) Before tax income $40,540 Tax at 35% rate $(14,189) After tax income $26,351 $ 26,351 / 200,000 13.18%
Before Tax After tax 12% PV Present Item Year Amount Tax % Amount Factor Value Cost of machine 0 $(200,000) $(200,000) 1 (200,000) Annual cash savings 1-5 $72,540 0.65
Need of 1,100,000 cans per year *.25 $275,000 Variable production costs *.05 $55,000 Wages $72,000 Health benefits $7,500 Other benefits $12,960 Total wages and benefits $92,460 $422,460 $495,000 (72540)
Before Tax Tax Effect After Tax Item Amount Amount Annual cash savings (make vs buy) $72,540 0.65 $47,151 * Tax effect on Annual Cash Savings is 1 - tax rate Tax savings due to depreciation $32,000 0.35 $11,200 * Tax effect on Depreciation is the tax rate Total annual cash flow $58,351.00
Initial investment/ Annual Cash Saving $200,000/ $58351= 3.4 years
Annual cash savings (before tax effect) $72,540 Less Depreciation $(32,000) Before tax income $40,540 Tax at 35% rate $(14,189) After tax income $26,351 $ 26,351 / 200,000 13.18%
Before Tax After tax 12% PV Present Item Year Amount Tax % Amount Factor Value Cost of machine 0 $(200,000) $(200,000) 1 (200,000) Annual cash savings 1-5 $72,540 0.65