Question

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 $660,000 cost with an expected four-year life and a $38,000 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 FVA of $1) (Use approprlate factor(s) from the tables provided. Round PV factor value to 4 decimal places.) Expected annual sales of new product Expected annual costs of new product Direct materials Direct labor $2, 290, 000 498, 00 690, 000 overhead (excluding straight-1ine depreciation on new nachine) selling and administrative expenses Income taxes 516, 000 178, 000 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 6% 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

Solition 1:

Depreciation = (660000- 38000) /2 = $155,500

Solution 2:

$2,290,000 Factor Company Expescted Net Income Revenues: Sales Expenses: Direct Materials Direct Labor Overhead excluding depreciation Selling and administrative expenses Straight line depreciation Total Expenses Income before taxes Income tax expense (30%) Net Income Expected net Cash Flow Net Income Add: Straight line Depreciation Net Cash Flow $498,000 $690,000 $516,000 $178,000 $ 155,500 12 $2,037,500 $252,500 $75,750 $176,750 $176,750 $155,500 $332,250 41 | 42 1) Sheet383 Sheet385 Sheet387 Sheet391 Sheet

Solution 3 and 4:

Payback Period Choose Numerator Choose Denominator = Payback Period Cost of investment / Annual net Cash flow = Payback Period $660,000/ $332,250 = 1.99 Years 11 12 Average Investment = ($660000+$38000)/2 = $349,000 Accounting rate of Return Choose Numerator Choose Denominator = Accounting Rate of Return Annual Net Income after tax / Average Investment = |Accounting Rate of Return $176,750 / $349,000= 50.64% 13 15 19 20 21 22 23 24 25 26 27 28 33 34 36 37 38 40 41 42 1) Sheet383 Sheet385 Sheet387 Sheet391 Sheet

Solution 5:

R S T U V УИ Chart Values are based on na 4 i= 6% Cash Flow Select Chart Amount * PV Factor = Present Value Annual cash Flow Present Value of an annuity of 1 | $332,250[*] 3.4651 = 1 $1,151,279 Residual Value present value of 1 $38,000* 0.7921 = $30,100 Present value of cash inflows $1,181,379 Present value of cash outflows -$660,000 Net Present Value $521,379 19 20 21 23 25 26 27 29 39 47 1) Sheet383 Sheet385 Sheet387 Sheet391 Sheet