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 $315,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $315,000 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. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Most Company has an opportunity to invest in one of two new projects. Project Y requires a $315,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $315,000 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. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Most Company has an opportunity to invest in one of two new projects. Project Y requires a $315,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $315,000 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.

Explanation / Answer

1.
Project Y: Net Income 55,110 + Dep. Expense (300,000 - 0 / 3 ) =100,000 = Net cash flow 155,110
Project Z: Net Income 41,002 + Dep. Expense (300,000 - 0 / 2) =150,000 = Net cash flow 191,002

2.
Project Y: 300,000 / 155,110 = Payback Period 1.93
Project Z: 300,000 / 191,002 = Payback Period 1.57

3.
Project Y: 55,110 / (300,000 / 2 ) = ARR 36.74%
Project Z: 41,002 / (300,000 / 2) = ARR 27.33%

4.
Project Y: 155,110 x 2.5313 = 392,630 - 300,000 = 92,630
Project Z: 191,002 x 1.7591 = 335,992 - 300,000 = 35,992

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