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 $325,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $325,000 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. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Compute each project’s annual expected net cash flows.

Determine each project’s payback period

Compute each project’s accounting rate of return.

Determine each project’s net present value using 6% as the discount rate. Assume that cash flows occur at each year-end.

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 six-year life and no salvage value. Project Z requires a $325,000 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. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Explanation / Answer

1.

Investment in project Y = $325000

Time = 6 years

Thus, annual depreciation for Project Y (Straight line method) = 325000/6 = $54166.67

Thus, yearly net cash flow for project Y = Net income + depreciation = 57920 + 54166.67

Yearly net cash flow for project Y = $112086.67

Investment in project Z = $325000

Time = 5 years

Thus, annual depreciation for Project Z (Straight line method) = 325000/5 = $65000

Thus, yearly net cash flow for project Z = Net income + depreciation = 36400 + 65000

Yearly net cash flow for project Z = $101400

2.

Payback period for project Y = investment / annual cash inflows = 325000/112086.67 = 2.899 years

Payback period for project Z = investment / annual cash inflows = 325000/ 101400 = 3.205 years

3.

Accounting rate of return for project Y = Average net income / investment = 57920/ 325000 = 17.82%

Accounting rate of return for project Z = Average net income / investment = 36400/ 325000 = 11.2%

4.

NPV for project Y = present value of cash inflows – initial investment

NPV for project Y =annual cash inflows*(1-1/(1+R)^n)/R - 325000            (n= 6 years, R = 6%)

NPV for project Y = 112086.67*(1-1/1.06^6)/.06 – 325000 = $226166.51

NPV for project Z = present value of cash inflows – initial investment

NPV for project Z =annual cash inflows*(1-1/(1+R)^n)/R - 325000            (n= 5 years, R = 6%)

NPV for project Z = 101400*(1-1/1.06^5)/.06 – 325000 = $102133.69

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.