Elite Company is planning to add a new product to its line. To manufacture this
ID: 2371665 • Letter: E
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 $488,000 cost with an expected four-year life and a $18,000 salvage value. All sales are for cash, and all costs are out of pocket except for depreciation on the new machine. Additional information includes the following. (Use Table B.1)
Compute straight-line depreciation for each year of this new machine’s life. (Omit the "$" sign in your response.)
Determine expected net income and net cash flow for each year of this machine’s life. (Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)
Compute this machine’s payback period, assuming that cash flows occur evenly throughout each year.(Round your answer to 2 decimal places.)
Compute this machine’s accounting rate of return, assuming that income is earned evenly throughout each year. (Round your answer to 2 decimal places. Omit the "%" sign in your response.)
Compute the net present value for this machine using a discount rate of 6% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the asset’s life.) (Round "PV Factor" to 4 decimal places. Round your intermediate calculations and final answer to the nearest dollar amount. Omit the "$" sign in your response.)
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 $488,000 cost with an expected four-year life and a $18,000 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. (Use Table B.1)
Explanation / Answer
Hi,
Please find the answers as follows:
Expected Net Income
Expected annual sales of new product (A) 1950000 Expected annual costs of new product
Direct materials 470000 Direct labor 672000 Overhead excluding straight-line depreciation on new machine 337000 Selling and administrative expenses 162000 Depreciation 117500 Total Annual Costs (B) 1758500 Income Before Taxes (A - B) 191500 Taxes (191500*.30) 57450 Net Income 134050
Cash Flow (134050 (Net Income +117500 (Depreciation)) 251550
Payback Period (Initial Investment/Annual Cash Flows) 1.94
Accounting Rate of Return (Net Income/Initial Investment) 27.47%
NPV (-488000 + 251550*(3.4651) + 18000*.7921) 397904
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