Homework
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 four-year life and no salvage value. Project Z requires a $350,000 investment for new machinery with a three-year life and no salvage value. The two projects yield the following predicted annual results. The Company uses straight-lie depreciation, and cash flows occur evenly throughout each year.
Project Y Project Z
Sales..........................................$350,000 $280,000
Expenses
Direct Materials............................$49,000 $35,000
Direct labor.................................$70,000 $42,000
Overhead including deprec............$126,000 $126,000
Selling & adm. expense................$25,000 $25,000
Total expenses...........................$270,000 $228,000
Pretax income.............................$80,000 $52,000
Income tax (30%).......................$24,000 $15,600
Net income.................................$56,000 $36,400
Required:
1. compute each project's annual expected net cash flows. (round the net cash flows to nearest dollar).
2. compute each project's accounting rate of return (round the percentage return to one decimal).
3. compute each project's payback period. (round the payback period to two decimals).
4. determine each project's net present value using 8% as the discount rate. For part 4 only, assume that cash flow occurs at each year-end. (round the net present value to the nearest dollar).
5. Identify the project you would recommend to management and explain your choice.