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
|
Sales
|
|
$
|
395,000
|
|
|
|
$
|
325,000
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct materials
|
|
|
55,300
|
|
|
|
|
40,625
|
|
|
|
|
Direct labor
|
|
|
79,000
|
|
|
|
|
48,750
|
|
|
|
|
Overhead including depreciation
|
|
|
142,200
|
|
|
|
|
146,250
|
|
|
|
|
Selling and administrative expenses
|
|
|
28,000
|
|
|
|
|
29,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
304,500
|
|
|
|
|
264,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
|
90,500
|
|
|
|
|
60,375
|
|
|
|
|
Income taxes (26%)
|
|
|
23,530
|
|
|
|
|
15,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
66,970
|
|
|
|
$
|
44,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Compute each project's annual expected net cash flows.
2. Determine each project's payback period
3. Compute each project's accounting rate of return.
4. Determine each project's net present value using 9% as the discount rate. Assume that cash flows occur at each year-end
Manning Corporation is considering a new project requiring a $96,500 investment in test equipment with no salvage value. The project would produce $75,000 of pretax income before depreciation at the end of each of the next six years. The company's income tax rate is 36%. In compiling its tax return and computing its income tax payments, the company can choose between the two alternative depreciation schedules shown in the table.
|
Straight-Line
Depreciation
|
MACRS
Depreciation
|
|
Year 1
|
|
$
|
9,650
|
|
|
$
|
19,300
|
|
Year 2
|
|
|
19,300
|
|
|
|
30,880
|
|
Year 3
|
|
|
19,300
|
|
|
|
18,528
|
|
Year 4
|
|
|
19,300
|
|
|
|
11,117
|
|
Year 5
|
|
|
19,300
|
|
|
|
11,117
|
|
Year 6
|
|
|
9,650
|
|
|
|
5,558
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
96,500
|
|
|
$
|
96,500
|
1. Complete the following table assuming use of straight-line depreciation. Net cash flow equals the amount of income before depreciation minus the income taxes.
2. Complete the following table assuming use of MACRS depreciation. Net cash flow equals the income amount before depreciation minus the income taxes.
3. Compute the net present value of the investment if straight-line depreciation is used. Use 8% as the discount rate.
4. Compute the net present value of the investment if MACRS depreciation is used. Use 8% as the discount rate.
Attachment:- Homework7.docx