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 $507,000 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.) $1,970,000 465,000 671,000 337,000 145,000 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 38% Required: 1. Compute straight-line depreciation for each year of this new machine's life. traight-line depreciation St

Explanation / Answer

Ans 1 SLM=507000-15000/4 123000 Ans 2 Expected Income Statement Revenue Expected Sales 1970000 Expenses Less: Direct Material 465000 Direct Labor 671000 Overhead 337000 Depreciation 123000 1596000 Gross profit 374000 Less: S & A Expenses 145000 Net income before taxes 229000 Income tax (38%) 87020 Net Income 141980 Add: Deprciation 123000 Expected Net Cash flow 264980 ans 3 Payback period 507000/264980 1.91 years Ans 4 Accounting Rate of return Average Net Income/Average Investment Numerator as equal in all years 141980 Denominator 507000+15000/2 246000 141980/246000 0.5772 rounded to two decimal 57.72% Ans 5 n=4 i=6% Amt PV factor Total Annual cash Flow PVIFA (6%,4) 264980 3.4651 918182.2 Residual value PVIF(6%,4) 15000 0.7921 11881.5 930063.7 Initial Investment 507000 NPV 423063.7 if rounded off 423064 Dear student there may be some difference in answer due to rounding off not mentioned in Q3 and 4. If there is difference kindly comment

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