Question

Required information Problem 24-2A 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 $335,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $335,000 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, EV of $1. PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Project Y Project Z $390,000 $312,000 Sales Expenses Direct materials Direct labor Overhead including depreciation Selling and administrative expenses Total expenses Pretax income 54,600 78,000 140,400 28,000 39,000 46,800 140,400 28, 000 254, 200 301,000 89,000 57,800 Income taxes (28%) 24,920 16,184 Net income $ 64,080 $ 41,616 Problem 24-2A Part 1 Required:

Answer 1

1) Net Cash Flows = Net Income + Depreciation Expense (Depreciation expense is added back because it is a non-cash expense which doesn't involve any cash flow) Project-Y $64,080 $83,750 Project-Z $41,616 $111,667 [Y = $335000 / 4 = $83750; Z = $335000 / 3 = $111667] Net Income Depreciation Expense Leave this cell blank Net Cash Flows $147,830 $153,283 2) Choose Numerator: Cost of Investment $335,000 $335,000 Payback Period Choose Denominator: Annual net cash flow $147,830 $153,283 Payback Period Payback Period 2.27 years 2.19 years Project-Y Project-Z 3) Choose Numerator: Annual after-tax net income $64,080 $41,616 Accounting Rate of Return Choose Denominator: Average Investment $167,500 $167,500 Accounting Rate of Return Accounting Rate of Return 38.3 24.8 Project-Y Project-Z NOTE: Average Investment for both Project-Y & Z= (Cost of investment + Salvage value) / 2 = ($335000 + $0) / = $167500.

Project-Y Chart values are based on: n = 4 i = 7% Select Chart Present Value of an Annuity of 1 X = Amount $147,830 PV Factor 3.3872 Present Value $500,730 Present value of cash inflows Present value of cash outflows Net present value $500,730 $335,000 $165,730 [As calculated above] [Cost of investment] [$500730 - $335000] Project-Z Chart values are based on: n = 3 i = 7% Select Chart Present Value of an Annuity of 1 II Amount $153,283 PV Factor 2.6243 Present Value $402,261 x 11 Present value of cash inflows Present value of cash outflows Net present value $402,261 $335,000 $67,261 [As calculated above] [Cost of investment] ($402261 - $335000]