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  • Sheet1: Working Note 1

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    Jay Patel
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    This document summarizes the costs and cash flows of making cans internally versus purchasing cans externally. It finds that making cans internally has an annual cash savings of $58,351 before taxes due to lower variable costs and employee salaries compared to purchasing cans. The payback period for the $200,000 equipment investment to make cans internally is 3.43 years. The internal rate of return is 17.99% and net present value is $33,039, indicating making cans internally is the better financial option.

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    finance

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    2010-10-09_042841_Clark_Paint

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    This document summarizes the costs and cash flows of making cans internally versus purchasing cans externally. It finds that making cans internally has an annual cash savings of $58,351 before taxes due to lower variable costs and employee salaries compared to purchasing cans. The payback period for the $200,000 equipment investment to make cans internally is 3.43 years. The internal rate of return is 17.99% and net present value is $33,039, indicating making cans internally is the better financial option.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLS, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as xls, pdf, or txt
    24 views4 pages

    Sheet1: Working Note 1

    Uploaded by

    Jay Patel
    This document summarizes the costs and cash flows of making cans internally versus purchasing cans externally. It finds that making cans internally has an annual cash savings of $58,351 before taxes due to lower variable costs and employee salaries compared to purchasing cans. The payback period for the $200,000 equipment investment to make cans internally is 3.43 years. The internal rate of return is 17.99% and net present value is $33,039, indicating making cans internally is the better financial option.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLS, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as xls, pdf, or txt
    of 4

    Sheet1

    Cost of new equipment Disposal value Total Production for Cans Annual production or purchase needs Salary for Employees (3*(2000*12*1.18 + 2500) Cost of raw materials per can Other variable production costs per can Costs to purchase one can Required rate of return Tax rate Working Note 1 Make Vs. Buy

    200000 40000 5500000 1100000 92460 25 5 45 12.00% 35.00%

    Make Purchase price Variable Cost Employee Salary Total Cash Cost Annual Cash Saving (Before Tax) Annual Cash Saving (After Tax) Working Note 2 Annual Depreciation = (200000-40000)/5 = $32000 Tax Saving Due to Depreciation = 32000*.35 = 11200 330000 92460 422460 72540 47151

    Buy 495000

    495000

    Part 1 Annual cash flows over the expected life of the equipment Annual Cash Saving (Make vs. Buy ) Tax Saving Due to Depreciation Annual Cash Flow Part 2 Payback period 47151 11200 $58,351.00

    Page 1

    Sheet1
    Payback period = Initial Investment/Annual Cash Saving = 200000/58351 = 3.43 Years Part 3 Annual rate of return Annual Cash Saving (Before Tax) Less: Depriciation Income before Taxes Less: Taxes Income After Taxes Beginning Investment Average Investment =(200000+40000)/2 Annual rate of return (Using Beg. Investment) = Income After Taxes/Beg Investment Annual rate of return (Using Avg. Investment) = Income After Taxes/Avg Investment Part 4 Net present value Year Cash Flow Initial Investment Annual Saving 0 -200000 1 58351 2 58351 3 58351 4 58351 5 58351 72540 32000 40540 14189 26351 200000 120000

    13.18% 21.96%

    Part 5 IRR Year 0 1 2 3 4 5 IRR Cash Flow -200000 58351 58351 58351 58351 98351 17.99%

    Page 2

    Sheet1

    Page 3

    Sheet1

    Salvage Value Total cash Flow PV factor @ 12% Present Value -200000 1 -$200,000.00 58351 0.892857143 $52,099.11 58351 0.797193878 $46,517.06 58351 0.711780248 $41,533.09 58351 0.635518078 $37,083.12 40000 98351 0.567426856 $55,807.00 NPV $33,039.37

    Page 4

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