Problem: 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-line 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 depreciation
|
126,000
|
126,000
|
|
Selling and administrative expenses
|
25,000
|
25.000
|
|
Total expenses
|
270,000
|
228.000
|
|
Pretax income
|
80,000
|
52,000
|
|
Income taxes (30%)
|
24,000
|
15,600
|
|
Net income
|
$ 56,000
|
$ 36.400
|
Requirement 1: Compute each project’s annual expected net cash flows.
Requirement 2: Determine each project’s payback period.
Requirement 3: Compute each project’s accounting rate of return.
Requirement 4: Determine each project’s net present value using 8% as the discount rate. Use the table given for annuity value.
For part 4 only, assume that cash flows occur at each year-end.