[The following information applies to the questions displayed below.] Most Compa

Question

[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. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Project Y Project Z $ 350,000 $ 280,000 Sales Expenses Direct materials Direct labor Overhead including depreciation Selling and administrative expenses 49,000 70,000 126,000 25,000 35,000 42,000 126,000 25,000 Total expenses 270,000 228,000 Pretax income Income taxes (30%) 80,000 24,000 52,000 15,600 Net income $ 56,000 $ 36,400

Explanation / Answer

Annual expected Net cash flow is as calculated below:

Payback period will be:

NPV is:

Project Y Year 0 Year 1 Year 2 Year 3 Year 4 Purchase Cost ($350,000) Salvage Value Sales 350,000 350,000 350,000 350,000 Direct material 49,000 49,000 49,000 49,000 Direct Labour 70,000 70,000 70,000 70,000 Overhead (Exclusing dep of 350,000/4) 38,500 38,500 38,500 38,500 Selling and administrative exp 25,000 25,000 25,000 25,000 Total expenses 182,500 182,500 182,500 182,500 Pretax Income 167,500 167,500 167,500 167,500 Income taxes 50,250 50,250 50,250 50,250 Net cash flow 117,250 117,250 117,250 117,250

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