Factor Company is planning to add a new product to its line. To manufacture this

Question

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. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) $1,840,000 Expected annual sales of new product Expected annual costs of new product Direct materials Direct labor Overhead (excluding straight-line depreciation on new machine) Selling and administrative expenses Income taxes 480,000 672,000 336,000 160,000 30% Required 1. Compute straight-line depreciation for each year of this new machine's life. 115,000 2. Determine expected net income and net cash flow for each year of this machine's life pected Net Income Revenues Expenses pected Net Cash Flow

Explanation / Answer

1) Caluculation of depreciation for year Particulars Amount($) Machine cost 480000 Salvage value 20000 460000 useful life 4 Depreciation for year 115000 2) Calculation of Net Income & Netcashflows particulars amount($) Revenue Expected annual sales of product 1840000 Expenses Direct material 480000 Direct Labour 672000 Overhead 336000 Selling and administrative expense 160000 Depreciation 115000 1763000 Profit Before Tax 77000 Tax@30% 23100 Profit After Tax 53900 add:Depreciation 115000 Annual cash Inflows 168900 3) Calculation of Payback period Year cashflows Cumulative Cash flows 1 168900 168900 2 168900 337800 3 168900 506700 4 168900 675600 cash Out flows 480000 at the end of 2 nd year Cash flows cover 337800 Amount to be recovered between 2 nd & 3 rd yers 142200 14075 10.10301954 Payback period 2 years 10 months 4) calculation of Accounting Rate of Return Accounting rate of return Netprofit after tax/Initial Investment Netprofit after Tax 53900 Initial investment 480000 ARR (53900/480000) 11.23 5) Calculation of Netpresent value Year cashflows PVF @7% Present value of Cashflows 1 168900 0.935 157921.5 2 168900 0.873 147449.7 3 168900 0.816 137822.4 4 188900 0.763 144130.7 587324.3 Present value of cashoutflows 480000 Net present Value 107324.3$

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