Elite Company is planning to add a new product to its line. To manufacture this

Question

Elite Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $494,000 cost with an expected four-year life and a $17,700 salvage value. All sales are for cash, and all costs are out of pocket except for depreciation on the new machine. Additional information includes the following. (Use Table B.1)

  

Compute straight-line depreciation for each year of this new machine%u2019s life. (Omit the "$" sign in your response.)

  

  

Determine expected net income and net cash flow for each year of this machine%u2019s life. (Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)

  

  

Compute this machine%u2019s payback period, assuming that cash flows occur evenly throughout each year. (Round your answer to 2 decimal places.)

  

  

Compute this machine%u2019s accounting rate of return, assuming that income is earned evenly throughout each year. (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

  

  

Compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the asset%u2019s life.) (Round "PV Factor" to 4 decimal places. Round your intermediate calculations and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

      Expected annual sales of new product $ 1,900,000   Expected annual costs of new product       Direct materials 485,000       Direct labor 675,000       Overhead excluding straight-line depreciation on new machine 335,000       Selling and administrative expenses 159,000       Income taxes 36 %

Explanation / Answer

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Answer:

Net Income:
Sales $1870000
Less: Expenses ($495000 + $671000 + $336000 + $144000) $1646000
Less: Depreciation (($500000 - $19600) / 6) $80067
Net Income before tax $143933
Less: Income tax ($143933 x 34%) $48937.22
Net Income after tax $94995.78 (Annually)

Net cash flow:
Sales $1870000
Less: Out of pocket expenses ($495000 + $671000 + $336000 + 144000) $1646000
Less: Income tax ($143933 x 34%) $48937.22
Net cash flow $175062.78 (Annually)

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