Question

Most Company has an opportunity to invest in one of two new projects. Project Y requires a $315,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $315,000 investment for new machinery with a four-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 $370,000 $296,000 Sales Expenses Direct materials Direct labor Overhead including depreciation Selling and administrative expenses Total expenses Pretax income Income taxes (28%) Net income 51,800 74,000 133,200 26,800 285,000 85,000 23,800 $ 61,200 37,000 44,400 133,200 26,000 240,600 55,400 15,512 $ 39,888 Required: 1. Compute each project's annual expected net cash flows. Project Y Project Z

Answer 1

1)

	Project Y	Project Z
Net income	61200	39888
Add:Depreciation (non cash)	63000   [315000/5]	78750    [315000/4]
Net Cash flow	124200	118638

2)

PAYBACK PERIOD
	Initial investment	/	Net cash flow	=	payback period
Y	315000		124200		2.54
Z	315000		118638		2.66

3)

ACCOUNTING RATE OF RETURN
	Net income	/	Average investment	=	Accounting rate of return
Y	61200		157500		38.86%
Z	39888		157500		25.33%

**Average investment= [Beginning book value +ending book value]/2

             = [315000+0]/2

            =157500

4)

Project Y
Chart values are based on
n	5
i	9%
select chart	Amount	*	PV factor	=	present value
present value of annuity	124200		PVA9%,5 3.88965		483094.53
Present value of annuity					483094.53
less:Initial investment					-315000
Net present value					168094.53
Project Z
Chart values are based on
n	4
i	9%
select chart	Amount	*	PV factor	=	present value
present value of annuity	118638		PVA9%,4 3.23972		384353.90
Present value of annuity					384353.90
less:Initial investment					-315000
Net present value					69353.90