Pleasant Company has an opportunity to invest in one of two new projects. Project Y requires a $700,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $700,000 investment for new machinery with a three-year life and no salvage value. The two projects yield the fol- lowing predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year.
Project Y Project Z
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $700,000 $560,000
Expenses
Direct materials . . . . . . . . . . . . . . . . . . . . . . . 98,000 70,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 40,000 84,000
Overhead including depreciation . . . . . . . . . . 252,000 252,000
Selling and administrative expenses . . . . . . . . 50,000 50,000
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 540,000 456,000
Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 60,000 1 04,000
Income taxes (30%) . . . . . . . . . . . . . . . . . . . . . . 48,000 31 ,200
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1 1 2,000 $ 72,800
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.)