Question

TBQ Enterprises will add a new product (Product M) to its production. To manufacture Product M, the company will have to purchase a new machine costing $820,000. The machine has an expected life of four years and salvage value of $54,000. 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. Round PV factor value to 4 decimal places.)

Expected annual sales of new product	$	2,690,000
Expected annual costs of new product
Direct materials		514,000
Direct labor		706,000
Overhead (excluding straight-line depreciation on new machine)		676,000
Selling and administrative expenses		194,000
Income taxes		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 4% 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.)

Answer 1

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