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

Question

Factor 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 $480,000 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. (PV of S1. FV of $1, PVA of S1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) $1,840,000 Expected annual sales of new product Expected annual costs of new product Direct materials Direct labor overhead (excluding straight-line depreciation on new machine Selling and administrative expenses Income taxes 480,000 672,000 336,000 160,000 30% Required 1. Compute straight-line depreciation for each year of this new machine's life. 2. Determine expected net income and net cash flow for each year of this machine's life. 3. Compute this machine's payback period, assuming that cash flows occur evenly throughout each year 4. Compute this machine's accounting rate of return, assuming that income is earned evenly throughout each year 5. Compute 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.)

Explanation / Answer

Life of the asset 4 year Amount In $ Cost of the new mechine 480,000 Salvage value 20,000 Net value of the asset 460,000 Depreciation of the asset Net Asset Value/ life of the asset Depreciation 115,000 Annual income statement Amount In$ Sale 1,840,000 Cost: Direct Material 480,000 Direct Labour 672,000 Overhead Excluding Depreciation 336,000 Selling and Administrative Overhead 160,000 Depreciation 115,000 1,763,000 Net Opearting Income 77,000 Income tax@30% 23,100 Income after Tax 53,900 Earning After tax and Before Depreciation( Cash flow) 168,900 Year1 Year2 Year3 Year4 Total Value Cash flow ( EBDAT)Earning Before dep and After tax 168,900 168,900 168,900 168,900 Discount factor@7% 0.9346 0.8734 0.8163 0.7629 Present Value(A) 157,850 147,524 137,873 128,853 572,100 Add Residual Value($20000*Discount factor of 4th yeari.e.7628)(B) 87,733 87,733 Present Value Of the mechine(A)+(B) 659,833 Less: Cost Of the machine(C) 480,000 Net Present Value of the Machine(A-C) 179,833

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