roblem 24-2A Analysis and computation of payback period, accounting rate of retu

Question

roblem 24-2A Analysis and computation of payback period, accounting rate of return, and net present value LO P1, P2, P3 The following information applies to the questions displayed below Most Company has an opportunity to invest in one of two new projects. Project Y requires a$315,000 Investment for new machinery with a four-year life and no salvage value. Project Z requires a $315,000 nvestment for new machinery with a three-year ife and no salvage value. The two projects yield following predicted annual results. The company uses straight-line depreclation, arld cash flows occur evebly throughout each year. (FVY of S1. PV of S1.FVA of S1 and PVA of St (Use appropriate factor(s) from the lables provided ProjectY Project Z 355,000 $284,000 Sales Expenses 49700 35,500 Direct materials Direct labor Overhead Including depreciation Selling and edministrative expenses nive expenses 7802.600 27,800 25,000 25,000 273500 230,900 Total expenses Pretax income Income taxes a4%) 8150053100 8,054 27710 Net income 53790 $35046

Explanation / Answer

1 Free cashflows Project Y Project Z Net Income 53790 35046 Add: Depriciation 78750 105000 Free cash flow 132540 140046 2 Payback Period Numerator Denominator Payback period Project Y 132540 315000 2.4 Project Z 140046 315000 2.2 3 ROR Numerator Denominator AROR Project Y 53790 157500 34% Project Z 35046 157500 22% Cost of asset /2 = 315000/2 = 157500 4 NPV Net Cas Flows Present Value of 1 at 10% annuity PV of net Cash Flows Year 1-4 132540 3.17 420151.8 Amount invested -315000 NPV 105151.8 Net Cas Flows Present Value of 1 at 10% annuity PV of net Cash Flows Year 1-3 140046 2.487 348294.4 Amount invested -315000 NPV 33294.4

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