PROBLEM SET B Cortino Company is planning to add a new product to its line. To m

Question

PROBLEM SET B Cortino 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 $300,000 cost with an expected four-year life and a $20,000 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. Required 1. Compute 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 payback period, assuming that cash flows occur evenly throughout each year. (Round the payback period to two decimals.) 4. Compute this machine's 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 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.)

Explanation / Answer

Answer:1 Straight Line depreciation=(Original cost-Salvage value/Estimated life)

=($300000-$20000)/4=$70000

Answer:2

Answer:3 Calculation of payback period:

=2 years+90000/105000=2.857 years

Answer:4 21.88%

Answer:5

Particulars Amount ($) Expected annual sales 1150000 Less: Cost Direct Material 300000 Direct Labor 420000 Overhead 210000 Selling & administration exp 100000 Depreciation 70000 EBIT 50000 Less: Tax @30% 15000 Net income 35000 Add: Dep 70000 Operating cash flow 105000

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