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 $300,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $300,000 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 Z $395,000 $316,000 Sales Expenses Direct materials Direct labor Overhead including depreciation Selling and administrative expenses 55,300 79,000 39,500 47,400 142,200 142,200 28,000 257,100 58,900 28,960 18 40 28,000 304,500 90,500 Total expenses Pretax income Income taxes (32%) Net income $ 61,540 40,052 Required 1. Compute each project's annual expected net cash flows. Project Y Project Z

Explanation / Answer

1 Computation of each Project annual expected net cash flows Project Y Project Z net income 61540 40052 Add: depreciation 75000 100000 Annual Cash flows 136540 140052 depreciation For project Y = cost of Asset - Salvage value / Life of the Asset =$300,000 -$ 0 /4 =$75,000 depreciation For project Z = cost of Asset - Salvage value / Life of the Asset =$300,000- 0 /3 =$100,000 2 Determination of Each Project Pay back period Choose numerator /   Chosse denominator = Pay back period Initial investment / Annual Cash Flows = Pay back period Project Y 3,00,000 / 136540 = 2.20 years Project Z 3,00,000 / 140052 = 2.14 years 3 Projects Accounting rate of return Accounting rate of return Choose numerator /   Chosse denominator = Accounting rate of return net Income / Investment = accounitng rate of return Project Y 61540 / 300,000 = 20.51 % Project Z 40052 / 300,000 = 13.35 % 4 Computation of Net Present Value of project Project Y Chart values based on n=4 I =6% 0 Select Chart Amount X PV factor = present value Cash inflow 136540 X 3.4651 = 473124.75 Less: Initial Investment 300000.00 Net Present value 173124.75 Project Z Chart values based on n=3 I =6% Select Chart Amount X PV factor = present value Cash inflow 140052 X 2.6730 = 374359.00 Less: Initial Investment 300000.00 Net Present value 74359.00

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