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Clarke Paints Inc Proposal

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Clark Paints, Inc. Proposal Recommendation

Clark Paints production department is looking to ways to lower total production costs. I have completed an analysis to determine if the company manufactured paint cans internally instead of purchasing them would reduce the production costs. As part of my analysis I have computed the Cash flows over the life of the project, Payback Period, Annual Rate of Return, Net Present Value and the Internal Rate of Return to use as the basis of my recommendation.

I recommend that Clark Paints Inc. should accept the proposal to manufacture the paint cans in lieu of their current practice of purchasing the paint cans. If the company continues to purchase the paint cans it will cost $495,000 annually, while manufacturing the same amount of paint cans would only cost $422,460 annually. Manufacturing the cans provides an annual after tax cash flow of $58,351 and this project exceeds the company’s minimum rate of return (also known as the hurdle rate) of 12%. Based on my analysis the estimated annual rate of return to manufacture the cans would be 13.18% with an overall internal rate of return of 26.9%. The initial investment of $200,000 in machinery and training would be fully recovered in 3.43 years and yield a net present value of $178,504. The net present value represents the difference between the present value of cash inflows and the present value of the cash outflows and takes into consideration the time value of money. I would also recommend that the company take the information in my analysis and compare this project’s profitability index to other proposed projects with the same initial investment and rank those to ensure the limited resources are invested in the projects the yield the greatest benefits or

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