Factor Company is planning to add a new product to its line. To manufacture this

Question

Factor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $519,000 cost with an expected four-year life and a $15,000 salvage value. All sales are for cash, and all costs are out-of-pocket, except for depreciation on the new machine. Additional information includes the following. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Factor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $519,000 cost with an expected four-year life and a $15,000 salvage value. All sales are for cash, and all costs are out-of-pocket, except for depreciation on the new machine. Additional information includes the following. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

$1,950,000 Expected annual sales of new product Expected annual costs of new product Direct materials Direct labor Overhead (excluding straight-line depreciation on new machine) Selling and administrative expenses Income taxes 495,000 672,000 337,000 175,000 32%

Explanation / Answer

1.

2.

Net Cash flows per annum

3.Payback period = Initial cost /Cash flows p.a

=5190000/224600

=2.31 years

4.Accounting rate of return = Net income/investment*100

=98600/519000*100

=19%

5.

Depreciation for each year Cost -solvage value/useful life (519000-15000)/4 126000

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