ork Saved Help Save & Exit Most Company has an opportunity to invest in one of t

Question

ork Saved Help Save & Exit Most Company has an opportunity to invest in one of two new projects. Project Y requires a $330,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $330,000 investment for new machinery with a four-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. (PV of $1.FV of $1. PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Project Y Project z $380,000 $304,000 Sales Expenses Direct materials Direct labor Overhead including depreciation Selling and administrative expenses 53,200 38,000 76,000 45,600 136,800136,800 27,000 27,000 293,000 247,400 87,000 56,600 Total expenses Pretax income Income taxes (328) Net income 27,840 18 112 59,160 38,488 Required: 1. Compute each project's annual expected net cash flows Project Y Project Z

Explanation / Answer

1) Expected Net Cash Flow ;-

2) Payback Period :-

= Cost of Investment / Annual Net Cash Flow

Project Y = $330000 / $125160 = 2.64 years

Project Z = $330000 / $120988 = 2.73 years

3) Rate of Return ;-

= Annual Net Income After Tax / Annual Average Investment

Project Y = $59160 / ($330000/2)

= $59160 / $165000

= 0.3585 or 35.85%

Project Z = $38488 / ($330000/2)

= $38488 / $165000

= 0.2333 or 23.33%

4) Net Present Value :-

Project Y :-

n = 5

i = 9%

PV Factor = 3.88965

Present Value of Cash inflow = Net Cash Flow * PV Factor

= $125160 * 3.88965

= $486829

Net Present Value = Present Value of Cash Inflow - Cost of Investment

= $486829 - $330000

= $156829

Project Z :-

n = 4

i = 9%

PV Factor = 3.2397

Present Value of Cash inflow = Net Cash Flow * PV Factor

= $120988 * 3.23972

= $391967

Net Present Value = Present Value of Cash Inflow - Cost of Investment

= $391967 - $330000

= $61967

Particulars Project Y Project Z Net Income $59160 $38488 Depreciation Expense (Assets Value / No. of Year of Life) $66000 $82500 Expected Net Cash Flow $125160 $120988

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