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 $345,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $345,000 investment for new machinery with a five-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 $ 320,000   Expenses       Direct materials 51,100 40,000       Direct labor 73,000 48,000       Overhead including depreciation 131,400 144,000       Selling and administrative expenses 26,000 29,000      Total expenses 281,500 261,000      Pretax income 83,500 59,000   Income taxes (38%) 31,730 22,420      Net income $ 51,770 $ 36,580   
4, Determine each project's net present value using 10% as the discount rate. Assume that cash flows occur at each year-end. (Round your intermediate calculations.) Project Y Chart values are based on: Select chart Amount x PV factor= Present Value Net present value Project Z Chart values are based on: n- Select chart Amount x PV factor= Present Value Net present value

Explanation / Answer

Since the net present value of both the project is negative there is no payabck period

Step 1 Particulars Project Y Project Z Pretax income 83500 59000 Depreciation 57500 69000 Profit before tax 26000 -10000 Tax at 38% 9880 -3800 Profit after tax 16120 -6200 Cah inflow (Profit+ dep) 73620 62800

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