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 $345,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $345,000 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.)

Compute each project’s annual expected net cash flows.

Determine each project’s payback period.

Compute each project’s accounting rate of return.

Determine each project’s net present value using 6% 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 $345,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $345,000 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

1 Annual Expected Net cash Flow Project Y Project Z Net Income after tax                                50,840                      32,984 Add: Depriciation                                57,500                      69,000 Net cash Flow                              108,340                   101,984 2 Project payback Period Initial Investment /Annual Payback Payback Period Initial Investment/ Annual payback =Payback Period (in years) Project Y 345000                   108,340                           3.18 Project Z 345000                   101,984                           3.38 Accounting rate of return Average return during the period /Average Investment 3 Accounting rate of return Average Return/ Average Investment =rate of return Project Y 50840                   345,000 14.7% Project Z 32984                   345,000 9.6% 4 Project Net Present value Project Y Annual Cash Fow PV Factot Present value                              108,340                   4.91732                    532,743 Less: Initial Invetsment                    345,000 Net Present value                    187,743 Project Z Annual Cash Fow PV Factot Present value                              101,984                   4.21236                    429,594 Less: Initial Invetsment                    345,000 Net Present value                      84,594

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