Most Company has an opportunity to invest in one of two new projects. Project Y

Question

Most Company has an opportunity to invest in one of two new projects. Project Y requires a $305,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $305,000 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.)

FV = http://lectures.mhhe.com/connect/0077429923/Images/tableb.2.JPG

PV = http://lectures.mhhe.com/connect/0077429923/Images/tableb.1.JPG

FVA = http://lectures.mhhe.com/connect/0077429923/Images/tableb.4.JPG

PVA = http://lectures.mhhe.com/connect/0077429923/Images/tableb.3.JPG

Project Y Project Z   Sales $ 390,000 $ 305,000   Expenses       Direct materials 54,600 38,125       Direct labor 78,000 45,750       Overhead including depreciation 140,400 137,250       Selling and administrative expenses 28,000 27,000      Total expenses 301,000 248,125      Pretax income 89,000 56,875   Income taxes (30%) 26,700 17,063      Net income $ 62,300 $ 39,812   

Explanation / Answer

Most Company has an opportunity to invest in one of two new projects. Project Y

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