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 $350,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $350,000 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.) Project Y Project Z $350,000 $280,000 Sales Expenses 35,000 42,000 126,000 126,000 25,000 270,000 228,000 52,000 15,600 $ 56,000 36,400 Direct materials Direct labor Overhead including depreciation Selling and administrative expenses 49,000 70,000 25,000 80,000 Total expenses Pretax income Income taxes (30%) Net income 24,000 Required: 1. Compute each project's annual expected net cash flows Project Y Project Z Expected net cash flows

Explanation / Answer

1. Net annual Cash Inflow Project Y Project Z Net Income $56,000 $36,400 Add: Dep. $87,500 $116,667 Net Annual Cash Inflow $143,500 $153,067 2. Cash Pay back Period = Intial incremental amt. Invested / Annual Incremental cash inflow from operation Project Y Project Z Intial Investments (A) $350,000 $350,000 Net Annual Cash Inflow (B) $143,500 $153,067 Cash Payback period (In Years) (A/B)                             2.44                       2.29 3. Annual rate of return = Average Accounting Profit / Average Investment Project Y Project Z Average Accounting Profit / Net Income ( C) 56000 36400 Intial Investments (A) 350000 350000 Average Investment (intial Investment/2) (D) 175000 175000 ARR (C / D) 32.00% 20.80% Computation of NPV( Project Y) Table or Calculator Function: Cash Outflow (beginning of year) $350,000 n= 0 i= 8% Present Value $350,000 Table or Calculator Function: Present Value Annuity of $1 Cash Infow (for next 4 year) $143,500 n= 4 i= 8% Table Factor 3.312 Present Value $475,272 $475,272 Computation of NPV (ProjectZ) Table or Calculator Function: Cash Outflow (beginning of year) $350,000 n= 0 i= 8% Present Value $350,000 Table or Calculator Function: Present Value Annuity of $1 Cash Infow (for next 3 year) $153,067 n= 3 i= 8% Table Factor 2.577 Present Value $394,454 $394,454 Total Net Present Value $44,454

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