Required information [The following information applies to the questions display

Question

Required information [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 $350,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $350,000 investment for new machinery with a three-year life and no salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year. (PV of $1 FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Project Y Project 2 $350,000 $280,000 Sales Expenses 35,000 42,000 126,000 126,000 25,000 270,000 228,000 52,000 15,600 56,000 36,400 Direct materials Direct labor Overhead including depreciation Selling and administrative expenses 49,000 70,000 25,000 80,000 Total expenses Pretax income Income taxes (30%) Net income 24,000

Explanation / Answer

1 Project Annual Expected Net Cash Flows Project Y Project Z Net Income 56000 36400 Add: Non cash Expense Depreciation 87500 116666.6667 ($350000/4 years) ($350000/3 years) Expected Net Cash Flows 143500                 153,067 2 Payback Period = Cost of Investment / Annual Cash Flow Project Y = $350000/$143500 =2.44 years Project Z = $350000/$153067 =2.29 years 3 Accounting Rate of Return = average annual profit / average investment Project Y = $56000/ $350000 = 16% Project Z = $36400/$350000 =10.40% 4 Calculate NPV PROJECT Y Year PVF @8% PV Initial Outflow -350000 0 1 -350000 Annual Cash Flows 143500 01-04 3.31212 475289.2 NPV 125289.2 PROJECT Y Year PVF @8% PV Initial Outflow -350000 0 1 -350000 Annual Cash Flows 153067 01-02 2.5771 394469 NPV 44468.97

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