Clark Paints: The Production Department Has Been Investigating Possible Ways to Trim Total Production Costs

In my analysis report, it shows that making the cans instead of buying the cans meets or exceeds management expectations and returns on investment. The report show and after tax profit of $26,351 or a13.18% return on assets during the five year life of the project.

Management's minimum rate of return is 12% and the project should generate $33,040 in PV dollars above the 12% required. The IRR suggests the project should generate an estimated 18% return from the initial investment. Although, 18% is an estimate it is still above the 12% that management is requiring.

I would recommend accepting this proposal, the only reasons I see that my they may not accept the proposal would be assumptions made about the cash rate of return and any labor issues that might arise, such as, injuries or employee turnover.

Clark Paint Investment Analysis

Cost of new equipment $200,000

Expected life of equipment in years 5

Disposal value in 5 years $40,000

Life production - number of cans 5,500,000

Annual production or purchase needs 1,100,000

Number of workers needed 3

Annual hours to be worked per employee 2000

Earnings per hour for employees $12.00

Annual health benefits per employee $2,500

Other annual benefits per employee-% of wages 18%

Cost of raw materials per can $0.25

Other variable production costs per can $0.05

Costs to purchase cans - per can $0.45

Required rate of return 12%

Tax rate 35%

Make Purchase

Annual cost of direct material:

Need of 1,100,000 cans per year $275,000

Annual cost of direct labor for new employees:

Wages $72,000

Health benefits $7,500

Other benefits $12,960

Total wages and benefits $92,460

Other variable production costs $55,000

Total annual production costs $422,460

Annual cost to purchase cans $495,000