Straight-Line Depreciation 12-12 A salad oil bottling plant can either buy caps

Question

Straight-Line Depreciation 12-12 A salad oil bottling plant can either buy caps for the glass bottles at 5¢ each or install $500,000 worth of plastic molding equipment and manufac- ture the caps at the plant. The manufacturing engi- neer estimates the material, labor, and other costs would be 3¢ per cap (a) If 11 million caps per year are needed and the molding equipment is installed, what is the payback period? (b) The plastic molding equipment would be depreciated by straight-line depreciation using a 6-year useful life and no salvage value. Assuming a combined 40% income tax rate, what is the after-tax payback period, and what is the after-tax rate of return?

Explanation / Answer

(a) Payback Period calculation gives us an idea that how long it will take for a project to recover the initial investment.

We can use cumulative cash flow table to see that when the cumulative cash flow is equal to zero (or non-negative). From below table we can see that the cost of project is recovered within one year

And Payback period = 500,000/ 32,500,000 = 0.015 years

(b)

After tax Payback period = 500,000/ 19,416,667 = 0.026 years

After tax rate of return = 39.83%

Year (t) Fixed cost (Value of equipment) Variable cost (The cost of materials and labor + other cash expences) at 2/unit for 11 million caps Total Expenses (fixed cost + variable cost) Buying Cost at 5/ unit (for 11 million) Cash flow from cost saving (Buying cost - Total expences) Cumulative Cash Flow Payback period (years) 0 500,000 500,000 (500,000) (500,000) 1 22,000,000 22,000,000 55,000,000 33,000,000 32,500,000 0.015 2 22,000,000 22,000,000 55,000,000 33,000,000 65,500,000 3 22,000,000 22,000,000 55,000,000 33,000,000 98,500,000 4 22,000,000 22,000,000 55,000,000 33,000,000 131,500,000 5 22,000,000 22,000,000 55,000,000 33,000,000 164,500,000 6 22,000,000 22,000,000 55,000,000 33,000,000 197,500,000

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.