Required information The following information applies to the questions displaye

Question

Required information The following information applies to the questions displayed below) Most Company has an opportunity to invest in one of two new projects. Project Y requires a $350.000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $350,000 investment for new machinery with a three-year life and no salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year. (PV of $1. FV of $1, PVA of $1, and FVA of S (Use appropriate factor(s) from the tables provided.) Sales Expenses 35e,e0 $28e,8 Direct materials Direct labor Overhead including depreciation Selling and administrative expenses 49,80035,080 78,880 42,000 126, ee0 126,e00 25,000 25,000 270,000 228,80 8e,e00 52,000 15.600 Total expenses Pretax income Incone taxes (38%) Net income 24,000 556,000 36,400 Required: 1. Compute each project's annual expected net cash flows Project Y Project Z

Explanation / Answer

Answer:

Compute each project’s annual expected net cash flows.

Project Y

Project Z

Net income

$56,000

$36,400

Depreciation expense

87500

116666.6667

Expected net cash flows

$143,500

$153,067

Depreciation expense ,Project Y =350,000/4 =85000

Depreciation expense ,Project Z =350,000/3 =116666.67

___________________________________________

2

Determine each project’s payback period.

Payback period

Choose Numerator:

/

Choose Denominator:

=

Payback period

Cost of investment

/

Annual Cash floe

=

Payback period

Project Y

350,000

$143,500

=

$2.44

Year

Project Z

350,000

$153,067

=

$2.29

Year

_____________________________________________

3

Compute each project’s accounting rate of return

Accounting rate of return

Choose Numerator:

/

Choose Denominator:

=

Accounting rate of return

Annual after tax income

/

Average Investment

=

Accounting rate of return

Project Y

56000

175000

32.0%

Project Z

36400

175000

20.8%

_______________________________________________

4

Determine each project’s net present value using 9% as the discount rate. Assume that cash flows occur at each year-end

Project Y

Chart values are based on:

n =

4

i =

8%

Select chart

Amount

x

Table factor

=

Present Value

Present value of annuity

143500

x

3.3121

=

$475,286

Present Value of cash inflow

$475,286

Present Value of cash out flow

-350,000

Net present value

125,286.4

Project Z

Chart values are based on:

n =

3

i =

8%

Select chart

Amount

x

Table factor

=

Present Value

Present value of annuity

153067

2.5771

=

$394,469

$394,469

-350,000

Net present value

44,469

Project Y

Project Z

Net income

$56,000

$36,400

Depreciation expense

87500

116666.6667

Expected net cash flows

$143,500

$153,067

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