Managerial Accounting - Course Project B

Managerial Accounting MAR12 Sec A

April 16, 2012

Course Project B

The production department has been looking at different projects and ways to cut expenses. The department has come up with a project that would have the department make their own paint cans and not have them purchased through a supplier. The first thing that would need to be done would be a piece of equipment would need to be purchased. We have been analyzing the project and have come up with some numbers to see if the project would be successful. The piece of equipment that will be purchased is to produce the cans that are currently being purchased from a supplier. The bottom line and cash inflow that will be generating compared to purchasing the cans is $47,151 after taxes. The tax savings that the company will receive on depreciation will be $11,200. This brings the total cash inflow to the company of $58,351 each year for five years. The piece of equipment only has a five year life and a salvage value of $40,000. We have analyzed the Internal Rate of Return of the project and it is at 18% . As we look at the Net Present Value of the project at 18%, this shows that the company would have a negative Net Present Value and should automatically be rejected. I agree with the project being rejected due to the Net Present Value being negative and the liability that the company will be taking on having additional employees on their payroll and the added expense if the equipment should break down. If the equipment were to break down, then that would put the production department on hold and would put the company on hold of selling additional cans of paint.