Clark Paints: The rest of my calculations Productions costs 422,460 Purchase cos

Question

Clark Paints:

 

 

The rest of my calculations

 

Productions costs 422,460

 

Purchase cost would be 495,000

 

Total Cash flow  58,351

 

annual Rate of return is 13.18%

 

net present value is 33,035

 

IRR Function is 18%


2. Would you recommend the acceptance of this proposal? Why or why not? Prepare a short double-spaced Word paper elaborating and supporting your answer

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%  

Explanation / Answer

Yes I recommend the acceptance of this proposal

Explanation:-

To evaluate projects we mainly analyze Net present value (NPV) As first preference and then Internal rate of returns (IRR)

Net present value (NPV) :-

The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.

NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.

NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.

Supporting Note:-

The present value (PV) of an amount to be received in the future is the discounted face value considering the length of time the receipt is deferred and the required rate of return (or appropriate discount rate under the circumstances). The notion of present value presumes that money has a time value—today 1 ;s dollar is worth more than the same dollar received at a future point in time—deriving from inflation, interest, and other considerations. This idea is used commonly when planning a capital budget.

IRR:-

The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.

By observing this IRR and NPV we can easily say that this project is worth while and we can select this project

Selection criteria is -----Positive NPV with Positive IRR

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