Most Company has an opportunity to invest in one of two new projects. Project Y
ID: 2475048 • Letter: M
Question
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $310,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $310,000 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. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Project Y
Project Z
Sales
$
365,000
$
292,000
Expenses
Direct materials
51,100
36,500
Direct labor
73,000
43,800
Overhead including depreciation
131,400
131,400
Selling and administrative expenses
26,000
26,000
Total expenses
281,500
237,700
Pretax income
83,500
54,300
Income taxes (40%)
33,400
21,720
Net income
$
$
32,580
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $310,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $310,000 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. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Explanation / Answer
Project X Project Y Sales $ 365,000.00 $ 292,000.00 Expenses Direct Material $ 51,100.00 $ 36,500.00 Direct Labor $ 73,000.00 $ 43,800.00 Overhead including depreciation $ 131,400.00 $ 131,400.00 Selling & Administerative Expenses $ 26,000.00 $ 26,000.00 Total Expenses $ 281,500.00 $ 237,700.00 Income before tax $ 83,500.00 $ 54,300.00 Income Tax@ 40% $ 33,400.00 $ 21,720.00 Net Income $ 50,100.00 $ 32,580.00 Add: Depreciation $ 77,500.00 $ 103,333.33 Operating Cash Flow $ 127,600.00 $ 135,913.33 Project X Year Investment Operating Cash flow Cumulative Cash Flow 0 $ (310,000.00) $ (310,000.00) 1 $ 127,600.00 $ (182,400.00) 2 $ 127,600.00 $ (54,800.00) 3 $ 127,600.00 4 $ 127,600.00 Pyaback Period= 2.43 Years Project Y Year Investment Operating Cash flow Cumulative Cash Flow $ - $ (310,000.00) $ (310,000.00) $ 1.00 $ 135,913.33 $ (174,086.67) $ 2.00 $ 135,913.33 $ (38,173.33) $ 3.00 $ 135,913.33 Pyaback Period= 2.28 Years PAYBACK PERIOD Project Cost of Investment/ Annual Net Cash Flow= Payback Period Project Y 310000/ $ 127,600.00 2.43 Project Z 310000/ $ 135,913.33 2.28 Accounting Rate of Return Project Average accounting Profit Average Investment Accounting Rate of return Project Y $ 50,100.00 $ 155,000.00 0.32 Project Z $ 32,580.00 $ 155,000.00 0.21 NET Present Value using 6% as Discount Factor Project Y n= 4 Years i= 6% Year Cash Flow P.v Factor P.V 0 $ (310,000.00) 1 $ (310,000.00) 1-4 y $ 127,600.00 3.4651 $ 442,146.76 NPV $ 132,146.76 Project z n= 3 Years i= 6% Year Cash Flow P.v Factor P.V 0 $ (310,000.00) $ 1.00 $ (310,000.00) 1-3 y $ 135,913.33 $ 2.67 $ 363,296.34 NPV $ 53,296.34
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