Question

Problem 25-2A Analysis and computation of payback period, accounting rate of return, and net present value LO P1, P2, P3 [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 $310,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $310,000 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 Sales $ 375,000 $ 300,000 Expenses Direct materials 52,500 37,500 Direct labor 75,000 45,000 Overhead including depreciation 135,000 135,000 Selling and administrative expenses 27,000 27,000 Total expenses 289,500 244,500 Pretax income 85,500 55,500 Income taxes (28%) 23,940 15,540 Net income $ 61,560 $ 39,960 Problem 25-2A Part 4 4. Determine each project’s net present value using 10% as the discount rate. Assume that cash flows occur at each year-end. (Round your intermediate calculations.)

Answer 1

A B project Y $ 310,000 project Z $310,000 initial investment life of asset annual depreciation $ 77,500 $ 103,333 Annual Net income annual depreciation Annual Cash Inflows Present Value Annuity Factor Present Value Total Cash Inflows Initial Investment Net Present Value project Y $ 61,560 $77,500 $ 139,060 3.16987 $ 440,802 $ 310,000 $ 130,802 project Z $ 39,960 $ 103,333 $ 143,293 2.48685 $ 356,348 $ 310,000 $ 46,348 = note - I have used the table factors rounded to 5 decimals.

for formulas and calculations, refer to the image below -

project Y project Z 310000 310000 initial investment life of asset annual depreciation = =D3/D4 =ROUND(E3/E4,0) project Y project Z Annual Net income 61560 39960 annual depreciation =D5 =E5 Annual Cash Inflows =D8+D9 =E8+E9 Present Value Annuity Factor =ROUND(-PV(10%,4,1),5) =ROUND(-PV(10%,3,1),5) Present Value Total Cash Inflows =ROUND(D10*D11,0) =ROUND(E10*E11,0) Initial Investment =D3 =E3 Net Present Value =D12-D13 =E12-E13 I note - I have used the table factors rounded to 5 decimals.

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