Problem 24-2A Analysis and computation of payback period, accounting rate of ret
ID: 2509965 • Letter: P
Question
Problem 24-2A Analysis and computation of payback period, accounting rate of return, and net present value LO P1, P2, P3 The following information applies to the questions displayed below Most Company has an opportunity to invest in one of two new projects. Project Y requires a $315,000 nvestment for new machinery with a four year life and no salvage value. Project Z requires$315.000 Investment for new machinery with a three-year life and no selvage value. The two projects yield the following predicted annual results. The company uses straight-ine depreciation, and cash fows occur evenly theoughout each year FV of S1. PV of S1, EVA of S1 and PVA of $t (Use appropriate factor(s) from the tables provided.) Sales 355.000 $284000 Expenses 49700 35,500 71000 127800 5,000 25,000 273,500 230900 1,5005300 27310 8,054 53790 $ 35.046 Direct materials Direct labor Overhead including deprecieiorn Seling and administrative expenses otal expenses Pretax Income Income taes (34%) Net incomeExplanation / Answer
Answer:
1
Project Y
Project Z
Net Income:
53790
35046
Add:
Depreciation Expense:
78750
105000
(315000/4)=78750
315000/3=105000
Expected Net Cash Flows:
132540
140046
2
Numerator
/
"Denominator
=
Payback Period
Cost of the investment
/
Annual net cash flow
=
Project Y
315000
/
132540
=
2.38
Year
Project Z
315000
/
140046
=
2.25
Year
3
Accounting rate of return
Numerator
/
"Denominator
=
ARR
Annual Afert tax net
income
/
Annual Average
investment
=
132540
53790
/
157500
=
34.15%
140046
35046
/
157500
=
22.25%
4
Project Y
Initial Investment
$315,000
Chart Values are Based on:
i =
10%
Year
Cash Inflow
x
PV Factor
=
Present Value
1
132540
0.9091
=
120492.114
2
132540
0.8264
=
109531.056
3
132540
0.7513
=
99577.302
4
132540
0.6830
=
90524.82
Total
420125.292
Less:Initial Investment
($315,000)
NPV
$105,125
Project Z
Initial Investment
$315,000
Year
Cash Inflow
x
PV Factor
=
Present Value
1
140046
0.9091
=
127315.8186
2
140046
0.8264
=
115734.0144
3
140046
0.7513
=
105216.5598
Total
348266.3928
Less:Initial Investment
($315,000)
NPV
$33,266
Project Y
Project Z
Net Income:
53790
35046
Add:
Depreciation Expense:
78750
105000
(315000/4)=78750
315000/3=105000
Expected Net Cash Flows:
132540
140046
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