Question - 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 four- 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 new product . . . . . . . . . . . . . . . . . . . . . . $ 1,150,000
Expected annual costs of 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%
Required:
Compute straight- line depreciation for each year of this new machine's life.
Determine expected net income and net cash flow for each year of this machine's life.
Compute this machine's payback period, assuming that cash flows occur evenly throughout each year.
Compute this machine's accounting rate of return, assuming that income is earned evenly throughout each year.
Compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year- end.