Acct 505 Part B Check Figure Total Annual Cash Flows After T

Acct505part B Check Figuretotal Annual Cash Flows After Tax Amount

Based on the provided information, the assignment involves analyzing a proposed capital expenditure to determine whether to manufacture paint cans internally or continue purchasing them from a supplier. The analysis requires calculating annual cash flows over the equipment's expected life, payback period, annual rate of return, net present value, and internal rate of return. Subsequently, a recommendation must be made regarding the acceptance of the proposal, supported by an elaborated justification.

Paper For Above instruction

Clark Paints faces a strategic decision to manufacture paint cans internally or continue purchasing them from an external supplier. This decision hinges on a comprehensive financial analysis that evaluates the potential cost savings, investment requirements, and profitability metrics associated with the proposed internal manufacturing process. The goal is to determine whether constructing new production equipment aligns with the company's financial targets, including achieving an acceptable return on investment and ensuring positive cash flows.

In assessing the proposal, the primary factors include the initial capital expenditure, incremental cash flows, depreciation methods, tax implications, and subsequent profitability. The investment involves purchasing equipment costing $200,000 with an expected salvage value of $40,000 at the end of its useful life. The equipment is projected to produce 5,500,000 cans over its lifespan, with an estimated annual requirement of 1,100,000 cans for the next five years. Cost considerations encompass raw materials, labor wages, employee benefits, and variable manufacturing costs, comparing these to the cost of purchasing cans at 45¢ each.

To conduct the financial analysis, calculations for annual cash flows must consider after-tax savings from manufacturing versus purchasing, accounting for operating costs, depreciation, and tax effects. The use of the unit-of-production depreciation method allocates depreciation expense based on actual output, impacting the annual accounting profits and cash flows. The analysis will employ Excel to accurately compute these metrics, including the payback period, which indicates how quickly the initial investment is recovered, and profitability indexes such as net present value (NPV) and internal rate of return (IRR).

Once the financial metrics are computed, the final step involves evaluating whether the project meets the company's hurdle rate of 12%. A project with an NPV greater than zero and an IRR exceeding the hurdle rate would typically be deemed acceptable. Conversely, if the project fails to meet these criteria, it may not be financially justified, even if other qualitative benefits exist.

Based on the analytical results—where the total annual cash flows after tax amount to approximately $58,351—the decision supports a thorough discussion of the project’s relative merits. The projected cash flows suggest favorable returns, but it is essential to confirm that all assumptions and calculations align with the company's financial policies and strategic objectives.

In conclusion, the recommendation will be grounded on whether the project yields a positive net present value, acceptable payback period, and a rate of return exceeding the minimum hurdle rate of 12%. A positive recommendation would affirm that manufacturing in-house offers a financially advantageous alternative, whereas a negative or uncertain outcome would advise maintaining current purchasing practices. This analysis ensures that the decision aligns with strategic cost management and capital budgeting best practices, ultimately contributing to the company's financial health and competitive position.

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