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Accounting 505 Project B

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Accounting 505 Course Project B
Jodi Metzger

Capital Budgeting Decision

Clark Paints has been investigating possible ways to trim production costs. One option is to make their paint cans instead of purchasing them from a supplier. The company estimates that it will need to manufacture 1,100,000 paint cans over the next 5 years. They have determined that their minimum rate of return for all new projects is 12%. Upon calculating the total cost of materials, labor and other variable production costs against the cost of purchasing the paint cans from a supplier, there is an annual cash savings of $72,540 in favor of making the paint cans. There is an addition cash savings due to depreciation of $32,000 and after taxes the total positive impact to cash flows is $58,351. This amount when figured into the payback period of the new equipment cost of $200,000 will make the payback period 3.4275 years which is a positive indicator for the project which has a 5 year length. The annual rate of return has been calculated at 13.18% which is above the required 12% for new projects. The net present value of the project is a positive $33,035.36 and the internal rate of return is 17.99% which is also above the required 12% for new projects. Every indicator shows a positive impact on the company. The decision should be made to move forward with the project to manufacture their own paint cans and discontinue the purchase of paint cans from a...

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