PLEASE HELP Most Company has an opportunity to invest in one of two new projects

Question

PLEASE HELP

Most Company has an opportunity to invest in one of two new projects. Project Y requires a $350,000 Problem 24-2A investment for new machinery with a four-year life and no salvage value. Project Z requires a $350,000 Analysis and computation of investment for new machinery with a three-year life and no salvage value. The two projects yield the fo payback period, accounting rate lowing predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly of return, and net present value throughout each year Project Y Project Z Expenses 49,000 70,000 26,000 25,000 270,000 80,000 24,000 35,000 42,000 26,000 25,000 228,000 52,000 15,600 Selling and administrative e xpenses ... " . Required 1. Compute each project's annual expected net cash flows. (Round the net cash flows to the nearest dollar.) 2. Determine each project's payback period. (Round the payback period to two decimals.) 3. Compute each project's accounting rate of return. (Round the percentage return to one decimal.) 4. Determine each project's net present value using 8% as the discount rate. For part 4 only, assume that Check For ProjectY: (2) 2.44 years (3) 32% 4) $125,286 cash flows occur at each year-end. Round the net present value to the nearest dollar.) Analysis Component 5. Identify the project you would recommend to management and explain your choice

Explanation / Answer

1. Annual net cash flow= net income + depreciation.

Depreciation is added back because it involves no cash outflow.

Cash flow:

2. payback period= initial investment/annual net cash flow:

3. accounting rate of return= net income/average investment

Average investmnet= investment/2 = 350000/2= 175000

4. Project Y NPV:

Project Z NPV:

5. based on payback period project Z can be preferred over project Y.

But these projects differ in time duration, they can not be compared solely on NPV. so annualised NPV is calculated and based on that prject Z is selected as it is earning higher annualised NPV.

Project Y Cost                                    3,50,000 Life 4 Salvage value 0 Depreciation= [Cost-salvage value]/Life 87,500.00 Per year

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