Factor Company is planning to add a new product to its line. To manufacture this
ID: 2792138 • Letter: F
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. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Expected annual sales of new product Expected annual costs of new product $1,840,000 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 2. Determine expected net income and net cash flow for each year of this machine's life 3. Compute this machine's payback period, assuming that cash flows occur evenly throughout each year. 4. Compute this machine's accounting rate of return, assuming that income is earned evenly throughout each year 5. Compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the asset's life.) Complete this question by entering your answers in the tabs below. RequiredRequired Required Required Required Determine expected net income and net cash flow for each year of this machine's life Expected Net Income 2 3 4 Revenues enses Expected Net Cash Flow 0 Required 1 Required3 >Explanation / Answer
Ans. Calculation of Depreciation annually = (480000-20000)/4 =115000
2. Calculation of Annual Income
Annual Sales $1840000
Less: Exp. (480000+672000+336000+160000) $1648000
Less. Depreciation $115000
PBT $77000
Less: Tax $23100
PAT $53900
Add: Depreciation exp. $115000
Total annual Cash income $168900
3. Calculation payback period of machine
total cost of machine is $480000
Annual income $168900
Payback period =168900+168900+142200/168900 = 2.84 yrs
4. Calculation of Accounting Rate of return = Average Return during the period/Average Investment
Average Investment = Initial investment+salvage value
2
Average investment = (480000+20000) /2 = 250000
Accounting Rate of return = 168900/250000 = 67.56%
5. Calculation of Net present value of machine
Present value of Cash outflow is = $480000
Calculation of PV of cash inflow = 168900Xcumulative PV @7% for 4yrs + 20000X pv at the end of 4yrs @7%
= 168900X3.3872 + 20000X.7629 = 572098+15258 = $587356
Net Present value= Pv of inflow-pv of outflow
= 587356-480000=$107356
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