Most Company has an opportunity to invest in one of two new projects. Project Y
ID: 2564725 • Letter: M
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 six-year life and no salvage value. Project Z requires a $315,000 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. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Determine each project’s net present value using 7% as the discount rate. Assume that cash flows occur at each year-end. (Round your intermediate calculations.)
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 six-year life and no salvage value. Project Z requires a $315,000 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. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Explanation / Answer
Annual depreciation of each project: Project Y = Cost -Salvage / life = 315000-0/ 6= $ 52500 Project Z : Cost - Salvage / life = 315000 -0 /5 = $ 63000 Annual Cash inflows of each project: Project Y Project Z Net Operating income 52800 34320 Add: Depreciation 52500 63000 Annual Cash inflows 105,300 97,320 Req 4: Net Present values Project Y Select Chart Amount * PV Factor = Present Value Present value of Annuity 105300 * 4.767 501965.1 (for 6 years discount rate 7%) Present value of cash inflows 501965.1 Present value of cash outflows 315000 Net Present values 186965.1 Project Z Select Chart Amount * PV Factor = Present Value Present value of Annuity 97320 * 4.100 = 399012 (for 5 years discount rate 7%) Present value of cash inflows 399012 Present value of cash outflows 315000 Net Present values 84012
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