Elite Company is planning to add a new product to its line. To manufacture this

Question

Elite Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $498,000 cost with an expected four-year life and a $18,500 salvage value. All sales are for cash, and all costs are out of pocket except for depreciation on the new machine. Additional information includes the following. Expected annual sales of new product $ 1,980,000 Expected annual costs of new product Direct materials $455,000 Direct labor $679,000 Overhead excluding straight-line depreciation on new machine $338,000 Selling and administrative expenses $172,000 Income taxes 36 % 1. Compute straight-line depreciation for each year of this new machine

Explanation / Answer

Hi, Part 1: SLD = 498000-18500/4 = 119875 Part 2: Sales= 1980000 Direct Material = 455000 Direct Labor = 679000 Overheads= 338000 Selling and Administrative = 172000 Tax = 336000*.36 = 120960 Cash Flow = 336000 - 120960 = 215040 Net Income = (336000 - 119875) * (1-.36) = 138320 Part3: Cash flow per year = 215040 Investment = 498000 Payback = Year 1 = 215040 Year 2 = 215040 =2*215040 = 430080 Balance = 498000 - 430080 = 67920 Payback Period = 2+67920/215040 = 2.32 years Part 4: Average Income/Investment = 138230/498000 = 27.76% Part 5: - 498000 + 215040/(1+.07)^1 + 215040/(1+.07)^2 + 215040/(1+.07)^3 + 215040/(1+.07)^4 + 18500/(1+.07)^4 = 244499.47 or 244500 Thanks, Aman

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