11.00 points Problem 24-1A Computation of payback perlod, accounting rate of ret
ID: 2533512 • Letter: 1
Question
11.00 points Problem 24-1A Computation of payback perlod, accounting rate of return, and net present value LO P1, P2, P3 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 $495,000 cost with an expected four-year life and a $19,000 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 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Expected annual sales of new product Expected annual costs of new product $1,60000 Directmaterials Directlabor Overhead (excluding straight-Hine depreciation on new mechine 335000 Selling and admiristrative expenses 475000 673.000 161,000 Income taxes Required Compute straight-line depreciation for each year of this new machine's life 2Determine expected net income and net cash flow for each year of this machine's life Net Income Revenues Sales Directmaterials Directlabor Overhead excludng straightline depreciaton on new machine Staightline depreciaton on new machine Seling and administative expenses 673,000 35,000 119,000 161,000 Total expenses 1,763,000 before taxes Income tax expense Net Cash Flow 119,000 t cash fiowExplanation / Answer
1.Straight Line Depreciation = $1,19,000 per year
Straight Line Depreciation for each year
= [ Cost of the machine – Salvage Value ] / Useful life
= [$495000 – 19000 ] / 4 Years
= $1,19,000 per year
2.Expected Net Income and Net cash Flow
EXPECTED NET INCOME
Revenues
Sales
$18,60,000
Expenses
Direct Materials
$475000
Direct Labor
$673000
Overhead
$335000
Straight Line Depreciation
$119000
Selling and administrative
$161000
$17,63,000
Income Before Taxes
$97000
Income Tax Expense
$36860
Net Income
$60140
EXPECTED CASH FLOW
Net Income
$60140
Straight Line Depreciation
$119000
Expected Cash Flow
$179140
3.Machine’s Payback Period = 2.76 Years
Payback Period = Investment / Net Cash Flow
= $495000 / $179140
= 2.76 Years
4.Machines Accounting Rate of Return = 12.15%
Accounting Rate of Return = [ Net Income / Investment ] * 100
= [ $60140 / $495000 ] * 100
= 12.15%
5.Nete Present Value = $94,363
N = 4 Years
I = 4%
Present Value of Residual Value = $19000 x 0.7350 = $13,965
Present Value of cash Inflow = $179140 x 3.2120 = $5,75,398
Present Value of cash outflow = $4,95,000
Net Present Value = $13,965 + $5,75,398 - $4,95,000
= $94,363
EXPECTED NET INCOME
Revenues
Sales
$18,60,000
Expenses
Direct Materials
$475000
Direct Labor
$673000
Overhead
$335000
Straight Line Depreciation
$119000
Selling and administrative
$161000
$17,63,000
Income Before Taxes
$97000
Income Tax Expense
$36860
Net Income
$60140
EXPECTED CASH FLOW
Net Income
$60140
Straight Line Depreciation
$119000
Expected Cash Flow
$179140
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