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Course Project B

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Clark Paints – Course Project B, Question 2
The production department determined that 1,100,000 cans would need to be manufactured each year for the next 5 years if Clark Paints were to begin making their paints cans instead of purchasing them. Considering all relevant costs it was determine that it would cost the company $422,460 annually to make the paints can versus $495,000 they are currently paying to buy the paint can. Clark Paints should accept the proposal to manufacture paint cans because it would result in an annual, before tax, cash savings of $72,540, as well as $32,000 in tax savings as a result of equipment depreciation. The total annual cash flow generated, after tax, is $ 58,351. The initial investment of $200,000, for equipment, would paid back in 3.43 years due to a 13.18% annual rate of return and overall decreased costs. The Net Present Value was calculated at $33,035. The Positive NPV indicates positive future cash flows and present equity. Annual cash flow generated within the 5 years would result in an Internal Rate of Return of 18%. The high Internal Rate of Return indicates an increased rate of future growth as a result of the reduced cost and increased cash flow. Again, this proposal should be accepted because of the significant reduction in cost, the attractive positive Net Present Value and the high Internal Rate of Return.

Calculations Summary:
Annual cash flows over the expected life of the equipment = $ 58,351
Payback period = 3.4 Years
Annual rate of return = 13.18%
Net present value = $ 33,035
Internal rate of return =

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