Clark Paints

Capital Budgeting Decision

Clark Paints should consider making cans in house by purchasing new machine and recruiting 3 new employees. Supporting statements and cash flows are given in separate spreadsheet. Make or Buy Worksheet shows that company would save $72,540 per year if made instead of purchasing. Company should accept the proposal to make the cans. Annual Cash Flows, Payback period, Annual Rate of Return, Net Present Value and Internal Rate of Return statements support the decision of making cans.

Annual Cash Flows

Cash flow is defined as revenue or expense that changes cash account over a given period. Annual cash flows prepared assuming company would make paint cans and how much company would save based on this decision. Expected Annual Cash flows are positive for making the paint cans instead of purchasing. Positive cash flow of $58,351 per year does support the decision of making cans in house.

Payback Period
Payback period refers to the period of time required for the return on new investment to cover the original investment. Payback period for making cans in factory is 3.4 years or 3 Years and 5 Months. As per the given assumptions new machinery will serve the company to make 5.5 Million cans and based on company expectations of making 1.1 Million cans per year, machinery will serve company 5 years. Before the end of life of machine company would be able to recover original investment made on machine.

Annual Rate of Return

Annual Rate of Return is the ratio of money gained or lost on an investment relative to the amount invested. Company can expect 13.18% rate of return per year on initial investment of machine for making cans in house.

Net Present Value

Net Present Value is the sum of present values of the individual cash flows of a specific company or department. Clark Paints expected annual savings and initial investment shows that the present value is $33,039 by taking time value of money.

Internal Rate of Return

Internal Rate of Return is a way to measure and compare the profitability of investments. IRR for Clark paints decision to make cans, would be at 18%. Company would earn 18% of profit on the initial investment to make cans instead of purchasing which makes it profitable for the company.