The following information applies to the questions displayed below./ Most Compan

Question

The following information applies to the questions displayed below./ Most Company has an opportunity to Invest in one of two new projects. Project Y requlres a $320,000 Investment for new machinery with a five-year life and no salvage value. Project Z requires a $320,000 Investment for new machlnery with a four-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.) Project Z $395,000 316,000 Project Y Sales Expenses Direct materlals Direct labor Overhead including depreciation Selling and administrative expenses 55,300 79,000 142,200 28,000 39,500 47,400 142,200 28,000 Total expenses 304,500 257100 Pretax Income Income taxes (40%) 90,500 36,200 58,900 23,560 Net Income $ 54,300 35,340 value: 1111 points Required 1. Compute each project's annual expected net cash flows Project Y Project Z

Explanation / Answer

Project Y Project Z Estimated Life of project 5 4 Investment 320,000 320,000 Salvage Value 0 0 Depreciable amount(Cost -Salvage Value) 320000 320000 Annual Depreciation (Depreciable amount /Life) 64000 80000 Req 1: Project Y Project Z Net operating income 54300 35340 Add: Annual depreciation 64000 80000 Annual Cash inflows 118300 115340 Req 2: Payback Period: Payback Period Initial Investment   / Annual Cash inflows = Payback Period Project Y 320000 / 118,300 = 2.71 years Project Z 320000 / 115,340 = 2.77 years Req 3: Projects NPV at 9% ProjectY Chart values are based on Number of years 5 years Interest 9% Amount   * PV factor Present value 118,300 * 3.8896 460139.68 Present value of cash inflows for 5 years 460139.68 Less: Present value of cash outflows 320,000 Net Present Value 140,140 Project Z Chart values are based on Number of years 4 years Interest 9% Amount   * PV factor Present value 115,340 * 3.2397 373666.998 Present value of cash inflows for 5 years 373666.998 Less: Present value of cash outflows 320,000 Net Present Value 53,667

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