Capital Budgeting Decision
Project 2:
Hampton Company: The production department has been investigating possible ways to trim total
production costs. One possibility currently being examined is to make the cans instead of
purchasing them. The equipment needed would cost $1,000,000, with a disposal value of
$200,000, and would be able to produce 27,500,000 cans over the life of the machinery. The
production department estimates that approximately 5,500,000 cans would be needed for each of
the next 5 years.
The company would hire six new employees. These six individuals would be full-time employees
working 2,000 hours per year and earning $15.00 per hour. They would also receive the same
benefits as other production employees, 15% of wages in addition to $2,000 of health benefits.
It is estimated that the raw materials will cost 30¢ per can and that other variable costs would be
10¢ per can. Because there is currently unused space in the factory, no additional fixed costs
would be incurred if this proposal is accepted.
It is expected that cans would cost 50¢ each if purchased from the current supplier. The
company's minimum rate of return (hurdle rate) has been determined to be 11% for all new
projects, and the current tax rate of 35% is anticipated to remain unchanged. The pricing for the
company’s products as well as number of units sold will not be affected by this decision. The unitof-production depreciation method would be used if the new equipment is purchased. Required:
1. Based on the above information and using Excel, calculate the following items for this
proposed equipment purchase. o Annual cash flows over the expected life of the equipment o Payback period o Simple rate of return o Net present value o Internal rate of return The check figure for the total annual after-tax cash flows is $271,150.
2. Would you recommend the acceptance of this proposal? Why or why not? Prepare a short,
double-spaced paper in MS Word elaborating on and supporting your answer.

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