Question

Check my work Problem 24-1A Computation of payback period, accounting rate of return, and net present value LO P1, P2, P3 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 $640,000 cost with an expected four-year life and a $36,000 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 S1 Ey of S1, PVA of $1 and FVA of 5) (Use appropriate factor(s) from the tables provided. Round PV factor value to 4 decimal places.) $2,240.000 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 496,000 688, 406,00 175,00 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. Required: Required 2 Required 3 Required 4 Required 5 Compute straight-line depreciation for each year of this new machine's life. Straig-tine depreciation Red Required 2 >

Answer 1

Amount 640000 1 Computation SLM depreciation Sno Particulars 1 Machine Cost 2 Life of Asset 3 Salvage Value 4 Depreciation[(1-3)/2] 36000 151000 2 Computation of net income and net cash inflows Annual cost(496000+688000+49 Year Annual sales 6000+176000) Depreciation Profit before tax Profit after tax@70% Cash inflows E=D*.7 F=E+C 2240000 1856000 151000 233000 163100 314100 2240000 1856000 151000 233000 163100 314100 2240000 1856000 151000 233000 163100 314100 2240000 1856000 151000 233000 163100 314100 1510

3 Payback Period Year Cash Inflows 314100 314100 314100 314100 Amount invested 640000 Year 1 to 2 inflow 628200 Balance to be recovered (640000-628200) in year 3= 11800 Period=2+11800/314100 Period=2+0.038 Payback Period= 2.038Years 4 Accounting rate of return Sno Particulars Amount Average annual net 1 savings(Profit after tax) 2 Initial investment 3 Accounting rate of return %25.484 (163100/640000*100) 163100 640000

5 Net Present value Year Cash Inflows PV Annuity Factor@7% Present value -640000 11 -640000 314100 0.9346 293551.4019 314100 0.8734 274347.1046 314100 0.8163 256399.1631 314100 0.7629 239625.3861 Net Present value 423923