connect. Factor Company is planning to add a new product to its line. To needs t
ID: 2476458 • Letter: C
Question
connect. Factor Company is planning to add a new product to its line. To needs to buy a new machine at a $480,000 cost with an expected four-year life and a $20,000 salvage value. All sales are for cash, and all costs are out of pocket except for depreciation on the new machine. Additional information includes the following manufacture this product, the company P Expected annual sales of new product .............................$%1,840,000 Expected annual costs of new product Direct materials . Overhead excluding straight-line depreciation on new machine Selling and administrative expenses 480,000 672,000 336,000 60,000 . . . . . . . . 30% Required . comase otn ionfor each year of this new machine's life (Rond derpreciation 2. Determine expected net income and net cash flow for each year of this machine's life. (Round answers 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 5. Compute the net present value for this machine using a discount rate of 7% and assuming that cash amounts to the nearest dollar.) to the nearest dollar.) (Round the payback period to two decimals.) each year. (Round the percentage return to two decimals.) flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the asset's life. Round the net present value to the nearest dollar.)Explanation / Answer
Answer 1.
cost of machine =480000
salvage value = 20000
Life = 4 years
yearly depreciation = (480000-20000)/4 = 115000
Answer 2
Annual sales
1840000
Direct material
-480000
Direct labour
-672000
Overhead excluding depreciation'
-336000
Selling and administeration exp
-160000
Depreciation
-115000
Net income before tax
77000
Tax 30%
-23100
Net income after tax
53900
Annual sales
1840000
Direct material
-480000
Direct labour
-672000
Overhead excluding depreciation'
-336000
Selling and administeration exp
-160000
Depreciation
-115000
Net income before tax
77000
Tax 30%
-23100
Net income after tax
53900
Depreciation
115000
Net cashflow
168900
Answer 3
payback period = 2+((480000-337800)/(506700-337800)) = 2.84 years
Year
Inflow
Cumulative cashflows
0
0
1
168900
168900
2
168900
337800
3
168900
506700
4
188900
695600
Answer 4
53900/480000 = 11.23%
Answer 5
Year
Inflow
Cumulative cashflows
Disc factor @7%
Discounted cashflows
0
0
1
0
1
168900
168900
0.934579439
1,57,850.47
2
168900
337800
0.873438728
2,95,047.60
3
168900
506700
0.816297877
4,13,618.13
4
188900
695600
0.762895212
5,30,669.91
NPV
13,97,186.11
Annual sales
1840000
Direct material
-480000
Direct labour
-672000
Overhead excluding depreciation'
-336000
Selling and administeration exp
-160000
Depreciation
-115000
Net income before tax
77000
Tax 30%
-23100
Net income after tax
53900
Annual sales
1840000
Direct material
-480000
Direct labour
-672000
Overhead excluding depreciation'
-336000
Selling and administeration exp
-160000
Depreciation
-115000
Net income before tax
77000
Tax 30%
-23100
Net income after tax
53900
Depreciation
115000
Net cashflow
168900
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