Most Company has an opportunity to invest in one of two new projects. Project Y
ID: 2483871 • Letter: M
Question
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $340,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $340,000 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
$
370,000
$
330,000
Expenses
Direct materials
51,800
41,250
Direct labor
74,000
49,500
Overhead including depreciation
133,200
148,500
Selling and administrative expenses
26,000
29,000
Total expenses
285,000
268,250
Pretax income
85,000
61,750
Income taxes (26%)
22,100
16,055
Net income
$
62,900
$
45,695
4. Determine each project’s net present value using 8% as the discount rate. Assume that cash flows occur at each year-end. (Round your intermediate calculations.)
Required:
1. Compute each project’s annual expected net cash flows
2. Determine each project’s payback period.
3. Compute each project’s accounting rate of return.
4. Determine each project’s net present value using 8% as the discount rate. Assume that cash flows occur at each year-end. (Round your intermediate calculations.)
Project Y
Project Z
Sales
$
370,000
$
330,000
Expenses
Direct materials
51,800
41,250
Direct labor
74,000
49,500
Overhead including depreciation
133,200
148,500
Selling and administrative expenses
26,000
29,000
Total expenses
285,000
268,250
Pretax income
85,000
61,750
Income taxes (26%)
22,100
16,055
Net income
$
62,900
$
45,695
4. Determine each project’s net present value using 8% as the discount rate. Assume that cash flows occur at each year-end. (Round your intermediate calculations.)
Explanation / Answer
Calculation for depriciation Depriciation = Cost / Useful life For Project Y , Depriciation = 340000/4 = 85000 For project Z , depriciation = 340000/3 = 113333 1) Annual Net cash Flow Project Y Project Z Net Income as per income statement 62900 45695 Add : Depriciation 85000 113333 Annual Net cash flow 147900 159028 2) Payback period = Initial Investment / Annual Cash flow Payback period ( years) 340000/147900 340000/159028 = 2.30 2.14 3) Accounting rate of return = Incremental accounting income / initial investment Accounting rate of return ( %) 62900/340000 * 100 45695/340000 * 100 = = 18.50 13.44 4) NPV = R * (1-( 1 + i)-n)/I - Initial investment Project Y R = 147900 I = 8% =0.08 N = 4 Initial investment = 340000 NPV = 147900 * (1 - ( 1+0.08)-4)/0.08 - 340000 = 147900 * ( 1 - 0.7350)/0.08 - 340000 = 147900 * ( 0.2650/0.08) - 340000 = 147900 * 3.3125 - 340000 = 489918.75 - 340000 = 149918.75 Project Z R = 159028 I = 8% =0.08 N = 3 Initial investment = 340000 NPV = 159028 * (1 - ( 1+0.08)-3)/0.08 - 340000 = 159028 * ( 1 - 0.7938)/0.08 - 340000 = 159028 * ( 0.2062/0.08) - 340000 = 159028 * 2.5775 - 340000 = 409894.67- 340000 = 69894.67 Hence NPV Project Y = 149918.75 Project Z = 69894.67
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