Most Compeny has an opportunity to invest in one of two new projects. Project Y

Question

Most Compeny has an opportunity to invest in one of two new projects. Project Y requires a $350000 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 salvege value. The two projects yield the following predicted annual results. The company uses straight-tine depreciation, and cash flows occur evenly throughout each year. FV of S1, PV of S1, FVA of S1 and PVA of $) (use appropriate fectorls) from the tables provided.) Project Yll"Project ZE1 $350,000 $280,000 Sales Expenses 35,000 42,000 26,000126,000 Selling and administrative expenses25,000 25,000 Direct matertais Dtrect labor Overhead including deprectation 49,000 70,000 Total expenses 270,000228,000 Pretax Income Income taxes (30%) 80,000 24,000 52.000 15,600 Net Income s 56,000$ 36.400

Explanation / Answer

1. calculation of annual expected cash inflow

(87500)*

*350000/4=87500

(116667)*

*350000/3=116667

2. Pay back period = Initial investment/annual cash flow

Project Y : 350000/80000 = 4.38 years

Project Z : 350000/52000 = 6.73 years

3. Accounting rate of return = Annual Cash flow/Initial investment

Project Y : 80000/350000 = 0.23

Project Z : 52000/350000 = 0.15

4. Calculation of Net present value

Project Y

Project Z

Particulars Project Y Project Z Revenue 350000 280000 Less : Expense (270000) (228000) Earning before deperciation & tax 80000 520000 Less : Deperciation

(87500)*

*350000/4=87500

(116667)*

*350000/3=116667

Earning before tax (7500) (64667) Less : Tax 0 0 Earning After tAx (7500) (64667) Add : Depeciation 87500 116667 Cash flow 80000 52000

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