Elite Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $300,000 cost with an expected 4 year life and a $20,000 salvage value. All sales are for cash and all costs are out of pocket except for depreciation on the new machine. Additional information includes the following:
Expected annual sales of a new product = $1,150,000
Expected annual costs of a new product:
Direct materials = $300,000
Direct labor = $420,000
Overhead excluding straight-line depreciation on new machine = $210,000
Selling and administrative expenses = $100,000
Income taxes = 30%
Questions:
1. Computer straight-line depreciation for each year of this new machine life.
2. Determine expected net income and new cash flow for each year of this machine's life.
3. Computer this machine's payback period, assuming that cash flows occur evenly throughout the year.
4. Computer this machine's accounting rate of return, assuming that income is earned evenly throughout each year.
5. computer the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year-end. Hint - Salvage value is a cash inflow at the end of the asset's life.