connect. Factor Company is planning to add a new product to its line. To manufac

Question

connect. 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. Expected annual sales of new product . $1,840,000 480,000 672,000 Overhead excluding straight-line depreciation on new machine ....336,000 Expected annual costs of new product Direct materials . Direct labor 1 60,000 Selling and administrative expenses Income taxes . 30% Required 1. Compute straight-line depreciation for each year of this new machine's life. (Round depreciation 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

Solution:

1 Annual Straight Line depreciation = ($ 480,000 - $ 20,000) / 4                    115,000 2 Net Income Net cash flow Expected annual sales of new product 1,840,000 1,840,000 Expected costs of new product Direct material 480,000 480,000 Direct labor 672,000 672,000 Overhead excludig depreciation 336,000 336,000 Depreciation on new asset                    115,000                        115,000 Selling and administrative expense 160,000 160,000 Income before taxes 77,000 77,000 Income taxes 23100 23100 Net income 53,900 53,900 Add: Depreciation                        115,000 Net cash flow                        168,900 3 Payback period = Initial investment / Annual cash flow Paybak period = $ 480.000- $ 20,000 / 168,900                                                                    2.72 4 Accounting rate of return = Net income / Initial investment 11.72%

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