Required information The following information applies to the questions displaye

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 $330,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $330,000 investment for new machinery with a five-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 Z $350,000 $280,000 Sales Expenses 49,000 35,000 70,000 42,000 126,000 126,000 25,000 270,000 228,000 52,000 13,520 $59,200 38,480 Direct materials Direct labor Overhead including depreciation Selling and administrative expenses 25,000 Total expenses Pretax income Income taxes (26%) Net income 80,000 20,800 Required 1. Compute each project's annual expected net cash flows Project Y Project Z

Explanation / Answer

Solution 1:

Solution 2:

Payback period = Initial investment / Annual cash inflows

Project Y = $330,000 / $114200 = 2.89 Years

Project Z = $330,000 / $104,480 = 3.16 Years

Solution 3:

Project accounting rate of return = Average annual income / Average investment

Average investment = (Cost + Salvage value)/2

Average investment = Project Y = ($330,000 + $0)/2 = $165,000

Average investment = Project Z = ($330,000 + $0)/2 = $165,000

Accounting rate of return - Project Y = $59,200 $165,000 = 35.88%

Accounting rate of return - Project Z = $38,480 $165,000 = 23.32%

Solution 4:

Computation of annual expected net cash flows Particulars Project Y Project Z Net Income $59,200.00 $38,480.00 Add: Depreciation $55,000.00 $66,000.00 Annual cash flows $114,200.00 $104,480.00

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