Factor Company is planning to add a new product to its line. To manufacture this
ID: 2437303 • Letter: F
Question
Factor 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 $499,000 cost with an expected four-year life and a $15,000 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. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) $1,990,000 Expected annual sales of new product Expected annual costs of new product Direct materials Direct labor Overhead (excluding straight-line depreciation on new machine) Selling and administrative expenses Income taxes 465,000 679,000 336,000 154,000 32% Required 1. Compute straight-line depreciation for each year of this new machine's life 2. Determine expected net income and net cash flow for each year of this machine's life 3. Compute this machine's payback period, assuming that cash flows occur evenly throughout each year. 4. Compute this machine's accounting rate of return, assuming that income is earned evenly throughout each year. 5. Compute the net present value for this machine using a discount rate of 7% 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.) Complete this question by entering your answers in the tabs below Required Required 2Required 3 Required 4 Required 5 Compute straight-line depreciation for each year of this new machine's life Required 1 Required 2 >Explanation / Answer
1.Straight Line Depreciation
Straight Line Depreciation for each year
= [Cost of the machine – Salvage Value ] / Useful life
= [$499,000 – 15,000] / 4 Years
= $121,000 per year
2.Expected Net Income and Net cash Flow
EXPECTED NET INCOME
Revenues
Sales
19,90,000
Expenses
Direct Materials
-4,65,000
Direct Labor
-6,79,000
Overhead
-3,36,000
Straight Line Depreciation
-1,21,000
Selling and administrative
-1,54,000
-17,55,000
Income Before Taxes
2,35,000
Income Tax Expens
Net Income
1,59,800
EXPECTED CASH FLOW
Net Income
1,59,800
Straight Line Depreciation
1,21,000
Expected Cash Flow
2,80,800
3.Payback Period
Payback Period
Numerator
/
Denominator
=
Payback Period
Initial Investment
/
Annual Net Cash Flow
=
Payback Period
$499,000
/
$2,80,800
=
1.78 Years
4.Accounting Rate of return
Accounting Rate of return
Numerator
/
Denominator
=
Accounting Rate of return
Net Income
/
Initial Investment
=
Accounting Rate of return
$ 1,59,800
/
$499,000
=
32%
Requirement 5 –Net Present Value
Chart values are based on
N=
7%
I=
4 Years
Cash flow
Select chart
Amount
PV Factor
Present Value
Annual cash flow
Present value of annuity of $1
$ 2,80,800
3.3872
$ 9,51,126
Residual Value
Present Value of $1
$15,000
0.7629
$ 11,444
Present Value of cash inflows
$ 9,62,570
Present Value of cash outflows
$499,000
Net Present Value
$ 4,63,570
EXPECTED NET INCOME
Revenues
Sales
19,90,000
Expenses
Direct Materials
-4,65,000
Direct Labor
-6,79,000
Overhead
-3,36,000
Straight Line Depreciation
-1,21,000
Selling and administrative
-1,54,000
-17,55,000
Income Before Taxes
2,35,000
Income Tax Expens
Net Income
1,59,800
EXPECTED CASH FLOW
Net Income
1,59,800
Straight Line Depreciation
1,21,000
Expected Cash Flow
2,80,800
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