Elite Company is planning to add a new product to its line. To manufacture this
ID: 2382045 • Letter: E
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 $490,000 cost with an expected four-year life and a $18,300 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. (Use Table B.1)
Compute straight-line depreciation for each year of this new machine
Expected annual sales of new product $ 1,930,000 Expected annual costs of new product Direct materials 480,000 Direct labor 670,000 Overhead excluding straight-line depreciation on new machine 336,000 Selling and administrative expenses 180,000 Income taxes 38 % 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 $490,000 cost with an expected four-year life and a $18,300 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. 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 the net present value for this machine using a discount rate of 6% and assuming that cash flows occur at each year-end.Explanation / Answer
A
Depreciation under-SLM = (490000-18300)/4 = $117925
B
PARTICULARS
AMOUNT
Sales
1930000
(-) Direct Material
-480000
(-) Direct Labor
-670000
(-) Overhead
-336000
(-) Selling and Admin Expenses
-180000
(-) Depreciation
-117925
EBIT
146075
(-) Tax @ 38%
55508.5
NET INCOME
90566.5
(+) Depreciation
117925
NET CASHFLOW
208491.5
Net income = 90566.5
Net cashflow = 208491.5
C
Payback Period = Time taken to cover investment
Thus,
490000 = 208491.5*n
n = 2.35 years
D
Accounting Rate of Return = Net Cashflow / Investment
= 208491.5/490000 = 42.55%
E
NPV = -490000 + 208491.5*PVIFA(6%,4) + 18300*PVIF(6%,4)
= $246939.14
B
PARTICULARS
AMOUNT
Sales
1930000
(-) Direct Material
-480000
(-) Direct Labor
-670000
(-) Overhead
-336000
(-) Selling and Admin Expenses
-180000
(-) Depreciation
-117925
EBIT
146075
(-) Tax @ 38%
55508.5
NET INCOME
90566.5
(+) Depreciation
117925
NET CASHFLOW
208491.5
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