Most Company has an opportunity to invest in one of two new projects. Project Y
ID: 2455067 • Letter: M
Question
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $325,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $325,000 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 $1) (Use appropriate factor(s) from the tables provided.)
1.Compute each project’s annual expected net cash flows.Project Y & Project Z
Determine each project’s payback period.
Compute each project’s accounting rate of return.
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $325,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $325,000 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 $1) (Use appropriate factor(s) from the tables provided.)
Explanation / Answer
Solution:
(1).
(A). Caluculation of Depreciation:
Project - Y:
Depreciation = $ 3,25,000 - 0 / 3
= 1,08,333.33
(B). Project -Z:
Depreciation = $ 3,25,000 - 0 / 3
= 1,08,333.33
(2). Annual Net Cash Flow Caluculation:
(A). Project -Y:
Project -Y = 56,780 + 1,08,333.33
= 1,65,113.33
(B). Project -Z:
Project -Z = 41,990 + 1,08,333.33
= 1,50,323.33
(3). Caluculation of PayBack Period:
(A). Project -Y:
PayBack Period = 56,780 / 3,25,000
= 0.174 Months
(B). Project -Z:
Pay Back Period = 41,990 / 3,25,000
= 0.129 Months
(4). Caluculation of Rate of Return:
(A). Project -Y:
Rate of Return = 56,780 / 3,25,000 * 100
= 0. 174 * 100
= 17.4
(B). Project -Z:
Rate of Return = 41,990 / 3,25,000 * 100
= 0.1292 * 100
= 12.92
Depreciation = Asset Value - Solvage Value / Estimated Life time of the ProjectRelated Questions
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