CASE ANALYSIS: Comprehensive Case on Capital Budgeting and Taxes
There are four alternative plans available to Liquid Chemical, Inc. with respect to the production and maintenance of containers used to ship the company's chemical products. These four alternative plans are as follows:
Alternative number one is for the company to contract with Packages, Inc. to both provide the required number of new containers and to maintain existing containers as required.
Alternative number two is for the company to continue to produce the required number of new containers in the company's internal Container Department, and to have the Container Department continue to maintain existing containers as required.
Alternative number three is for the company to contract with Packages, Inc. to provide the required number of new containers, but to have the company's internal Container Department to continue to maintain existing containers as required.
Alternative number four is for the company to continue to produce the required number of new containers in the company's internal Container Department, but to contract with Packages, Inc. to maintain existing containers as required.
Net present value analyses were performed for each of the four alternative plans. In each instance, the net present value analysis is for a five year period, an after tax hurdle rate of 10 percent is assumed, and a company income tax rate of 40 percent is assumed. Alternative Number One
Total costs for new containers and the maintenance of existing containers will be $775,000 per year. Because the company's income tax rate is assumed to be 40 percent, only 60 percent of these costs ($465,000 per year) are included in the net present value analysis. Additionally, the company will sustain a book value loss on the sale of surplus equipment. The equipment has a current book value of $240,000 and can be sold for $80,000. The loss, thus, will be $160,000. Agai...