Elite Company is planning to add a new product to its line. To manufacture this

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 $492,000 cost with an expected four-year life and a $18.800 salvage value. All sales are for cash, and all costs are out of pocket except for depreciation on the new machine. Additional information includes the following Compute straight-line depreciation for each year of this new machine's life. (Omit the "$" sign in your response.) Determine expected net income and net cash flow for each year of this machine's life. (Round your answers to the nearest dollar amount. Omit the "$" sign in your response.) Compute this machine's payback period, assuming that cash flows occur evenly throughout each year. (Round your answer to 2 decimal places.) Compute this machine's accounting rate of return, assuming that income is earned evenly throughout each year. (Round your answer to 2 decimal places. Omit the "%" sign in your response.) Compute the net present value for this machine using a discount rate of 6% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the asset's life.) (Round "PV Factor" to 4 decimal places. Round your intermediate calculations and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

Explanation / Answer

1)Straight line Depreciation for each year Depreciation = (Cost - salvage value) / Life of machine (492000-18800)/4 = 118300 2)Expected Net Income Sales - Costs - depreciation - Tax Sales 1900000 Less: Costs Direct Materials 475000 Direct Labor 676000 Overheads 335000 Depreciation 118300 Selling and Administrative Expenses 179000 Income Tax (40%) 46680 Net Income 70020 Add: Depreciation 118300 AFTER TAX CASH FLOWS 188320 3)Payback period Cost of machine / Cash inflows = 492000/188320 = 2.61 years 4) Accounting rate of return EBIT/Net Investment = 116700/510800= 22.85% 5) Cash flows Year Cash flows P.V@6% Discounted cash inflows 1 to 4 years 188320 3.465106 652548.69 Sum of Discounted Cash inflows 652548.69 Cash Outflows 492000 NPV 160548.69

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