Question

(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 five-year life and no salvage value. Project Z requires a $310,000 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 $360,000 $288,000 Sales Expenses Direct materials Direct labor Overhead including depreciation Selling and administrative expenses Total expenses Pretax income Income taxes (30%) Net income 50, 400 72,000 129,600 26,000 278,000 82,000 24,600 $ 57,400 36,000 43, 200 129,600 26,000 234, 800 53, 200 15,960 $ 37,240 Required: 1. Compute each project's annual expected net cash flows. Project Y Project Z

Answer 1

Ans. 1	Depreciation is a non cash expense, so it will be added back to net income
	for the calculation of net cash flows.
		Project Y	Project Z
	Net income	$57,400	$37,240
	Add: Depreciation	$62,000	$77,500
	Net cash flows	$119,400	$114,740
	*Depreciation = (Cost of project - Salvage value) / Useful life in years
	Project Y	($310,000 - $0) / 5	$62,000
	Project Z	($310,000 - $0) / 4	$77,500