Elite company is planning to add a new product to its line. To manufacturer this

Question

Elite company is planning to add a new product to its line. To manufacturer this product, the company needs to buy a new machine at a $300,000 cost with an expected 4 year life and a $20,000 salvage value. All sales are for cash, and all cost are out of pocket except for the depreciation on the new machine. Additional information includes the following:

-cost of new machine $300,000

-life of new machine in years 4

-salvage value if new machine $20,000

-expected annual sales of new product $1,150,000

Expected annual cost of new product :

-direct materials $300,000

-direct labor $420,000

-overhead excluding SL depreciation on new machine $210,000

-selling and administrative expenses $100,000

-income taxes 30%

-discount rate for net present value of investment 7%

1. Compute the straight line depreciation for each year of this new machine’s life. (round depreciation amounts to the nearest dollar)

2. Determine expected net income and net cash flow for each year of this machine’s life. (round answers to the nearest dollar)

3. Compute this machine’s paycheck period, assuming that cash flows occur evenly throughout each year (round the paycheck period to two decimals)

4. Compute this machines accounting rate of return, assuming that income is earned evenly throughout each year. (round the percentage return to two decimals

5. Compute the net present value for this machine using a discount rate of 75% and assuming that cash flows occur at each year-end (hint: salvage value is a cash inflow at the end if the assets life. Round the net present value to the nearest value)

I have the entire answer. I just want to know how to get part 5. I know you add back in the 20,000 but how do you come up with the 15,258 (the present value of salvage value at year 4)?

Explanation / Answer

Answer: Net Income: Sales $1870000 Less: Expenses ($495000 + $671000 + $336000 + $144000) $1646000 Less: Depreciation (($500000 - $19600) / 6) $80067 Net Income before tax $143933 Less: Income tax ($143933 x 34%) $48937.22 Net Income after tax $94995.78 (Annually) Net cash flow: Sales $1870000 Less: Out of pocket expenses ($495000 + $671000 + $336000 + 144000) $1646000 Less: Income tax ($143933 x 34%) $48937.22 Net cash flow $175062.78 (Annually)

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