2017 Accounting 2 Secti Managerial Accounting ter 24 Capital Budgeting Homework

Question

2017 Accounting 2 Secti Managerial Accounting ter 24 Capital Budgeting Homework KQuestions 5-8 (of 12) The following information applies to the questions displayed below. 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 five-year life and no salvage value. Project Z requires a $350,000 investment for new machinery 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 S1. PV of $1, FVA of $1 and PVA of S) (Use appropriate factor(s) from the tables provided.) Project Ylil Project Z 395,000 $316,000 Sales Direct materials Direct labor Overhead including depreciation Selling and administrative expenses 55,300 79,000 39,500 47,400 142,200142.200 28,000 28,000 Total expenses 304,500257100 90,500 122,382 3439058,900 $56,110$36,518 Pretax income income taxes (38%) Net income value 2.00 points Required 1. Compute each project's annual expected net cash flows

Explanation / Answer

1)

Project Y

Project Z

Net income

56110

36518

Depreciation expense

350000/5 = 70000

350000/4 = 87500

Annual expected net cash flows

126110

124018

2)

Payback period:

Choose Numerator

/

Choose Denominator

=

Payback period

Project Y

350000

/

126110

=

2.775 years

Project Z

350000

/

124018

=

2.822 years

3)

Accounting rate of return:

Choose Numerator

/

Choose Denominator

=

Accounting rate of return

Project Y

126110

/

350000

=

36.03%

Project Z

124018

/

350000

=

35.43%

4)

Project Y:

n = 5 years

i = 9%

PV factor = Present value annuity factor(9%,5) = 3.889

Present value of cash inflow = 126110*3.889 = 490441.79

Net Present value = Present value of cash inflow – Cash outflow

= 490441.79 – 350000 = 140441.79

Project Z :

n = 4 years

i = 9%

PV factor = Present value annuity factor(9%,4) = 3.2397

Present value of cash inflow = 124018*3.2397 = 401781.11

Net Present value = Present value of cash inflow – Cash outflow

= 401781.11 – 350000 = 51781.11

Project Y

Project Z

Net income

56110

36518

Depreciation expense

350000/5 = 70000

350000/4 = 87500

Annual expected net cash flows

126110

124018

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