1.Straight Line Depreciation
Straight Line Depreciation for each year = [Cost of the machine – Salvage Value] / Useful life
= [$640,000 - $36,000] / 4 Years
= $604,000 / 4 Years
= $151,000 per year
2.Expected Net Income and Net cash Flow
EXPECTED NET INCOME |
Amount ($) |
|
Revenues |
||
Sales |
22,40,000 |
|
Expenses |
||
Direct Materials |
4,96,000 |
|
Direct Labor |
6,88,000 |
|
Overhead |
4,96,000 |
|
Straight Line Depreciation |
1,51,000 |
|
Selling and administrative |
1,76,000 |
20,07,000 |
Income Before Taxes |
2,33,000 |
|
Income Tax Expense at 30% |
69,900 |
|
Net Income |
1,63,100 |
|
EXPECTED CASH FLOW |
||
Net Income |
163,100 |
|
Add: Straight Line Depreciation |
151,000 |
|
Expected Cash Flow |
314,100 |
|
3.Payback Period
Payback Period |
||||
Numerator |
/ |
Denominator |
= |
Payback Period |
Initial Investment |
/ |
Annual Net Cash Flow |
= |
Payback Period |
$604,000 |
/ |
$314,100 |
= |
2.04 Years |
4.Accounting Rate of return
Accounting Rate of return |
||||
Numerator |
/ |
Denominator |
= |
Accounting Rate of return |
Net Income |
/ |
Annual average Investment |
= |
Accounting Rate of return |
$163,100 |
/ |
$338,000 |
= |
48.25% |
Annual average Investment = [Initial Investment + Salvage Value] / 2
= [$640,000 + $36,000] / 2
= $676,000 / 2
= $338,000
Requirement 5 –Net Present Value
Chart values are based on |
||||
n = |
4 Years |
|||
i = |
7.00% |
|||
Cash flow |
Select chart |
Amount |
PV Factor |
Present Value |
Annual cash flow |
Present value of annuity of $1 |
$314,100 |
3.3872 |
$1,063,920 |
Residual Value |
Present Value of $1 |
$36,000 |
0.7629 |
$27,464 |
Present Value of cash inflows |
$1,091,384 |
|||
Present Value of cash outflows |
$640,000 |
|||
Net Present Value |
$451,384 |
NOTE
-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.
-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.
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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 $500,000 cost with an expected four-year life and a $22,000 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....
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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 $1. EV of $1. PVA of $1, and EVA of $1) (Use appropriate factor(s) from the tables provided....
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