Required: 1. Compute each project’s annual expected net cash flows. Required inf

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Required:
1. Compute each project’s annual expected net cash flows.

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Most Company has an opportunity to invest in one of two new projects. Project Y requires a $340,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $340,000 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.)

Project Y Project Z Sales $ 385,000 $ 308,000 Expenses Direct materials 53,900 38,500 Direct labor 77,000 46,200 Overhead including depreciation 138,600 138,600 Selling and administrative expenses 28,000 27,000 Total expenses 297,500 250,300 Pretax income 87,500 57,700 Income taxes (26%) 22,750 15,002 Net income Project Y Project Z $ 64,750 $ 42,698

Explanation / Answer

Project Y Project Z Sales 385,000 308,000 Expenses Direct materials 53,900 38,500 Direct labor 77,000 46,200 Overhead including depreciation 138,600 138,600 Selling and administrative expenses 28,000 27,000 Total expenses 297,500 250,300 Pretax income 87,500 57,700 Income taxes (26%) 22,750 15,002 Net income N 64,750 42,698 Add: Depreciation D 56667 68000 340000/6 340000/5 Annual cash flow N+D 121,417 110,698

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