Hampton Company: The production department has beeninvestigating possible ways to trim total production costs. Onepossibility currently being examined is to make the cans instead ofpurchasing them. The equipment needed would cost $1,000,000, with adisposal value of $200,000, and would be able to produce 27,500,000cans over the life of the machinery. The production departmentestimates that approximately 5,500,000 cans would be needed foreach of the next 5 years. The company would hire six new employees.These six individuals would be full-time employees working 2,000hours per year and earning $15.00 per hour. They would also receivethe same benefits as other production employees, 15% of wages inaddition to $2,000 of health benefits. It is estimated that the rawmaterials will cost 30¢ per can and that other variable costs wouldbe 10¢ per can. Because there is currently unused space in thefactory, no additional fixed costs would be incurred if thisproposal is accepted. It is expected that cans would cost 50¢ eachif purchased from the current supplier. The company's minimum rateof return (hurdle rate) has been determined to be 11% for all newprojects, and the current tax rate of 35% is anticipated to remainunchanged. The pricing for the companyâs products as well as numberof units sold will not be affected by this decision. Theunit-of-production depreciation method would be used if the newequipment is purchased. Required: 1. Based on the above informationand using Excel, calculate the following items for this proposedequipment purchase. Annual cash flows over the expected life of theequipment Payback period Simple rate of return Net present valueInternal rate of return The check figure for the total annualafter-tax cash flows is $271,150. 2. Would you recommend theacceptance of this proposal? Why or why not? Prepare a short,double-spaced paper in MS Word elaborating on and supporting youranswer.
Hampton Company: The production department has beeninvestigating possible ways to trim total production costs. Onepossibility currently being examined is to make the cans instead ofpurchasing them. The equipment needed would cost $1,000,000, with adisposal value of $200,000, and would be able to produce 27,500,000cans over the life of the machinery. The production departmentestimates that approximately 5,500,000 cans would be needed foreach of the next 5 years. The company would hire six new employees.These six individuals would be full-time employees working 2,000hours per year and earning $15.00 per hour. They would also receivethe same benefits as other production employees, 15% of wages inaddition to $2,000 of health benefits. It is estimated that the rawmaterials will cost 30¢ per can and that other variable costs wouldbe 10¢ per can. Because there is currently unused space in thefactory, no additional fixed costs would be incurred if thisproposal is accepted. It is expected that cans would cost 50¢ eachif purchased from the current supplier. The company's minimum rateof return (hurdle rate) has been determined to be 11% for all newprojects, and the current tax rate of 35% is anticipated to remainunchanged. The pricing for the companyâs products as well as numberof units sold will not be affected by this decision. Theunit-of-production depreciation method would be used if the newequipment is purchased. Required: 1. Based on the above informationand using Excel, calculate the following items for this proposedequipment purchase. Annual cash flows over the expected life of theequipment Payback period Simple rate of return Net present valueInternal rate of return The check figure for the total annualafter-tax cash flows is $271,150. 2. Would you recommend theacceptance of this proposal? Why or why not? Prepare a short,double-spaced paper in MS Word elaborating on and supporting youranswer.
