Question

Most Company has an opportunity to invest in one of two new projects. Project Y requires a $320,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $320,000 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. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

	Project Y					Project Z
Sales		$	365,000				$	292,000
Expenses
Direct materials			51,100					36,500
Direct labor			73,000					43,800
Overhead including depreciation			131,400					131,400
Selling and administrative expenses			26,000					26,000
Total expenses			281,500					237,700
Pretax income			83,500					54,300
Income taxes (28%)			23,380					15,204
Net income		$	60,120				$	39,096

Required: 1. Compute each project's annual expected net cash flows. Project Y $ 60,120 $ 39,096 Project Z Net income Depreciation expense Expected net cash flows

Answer 1

Answer 1:

Project Y:

Depreciation (using straight line method) = (New machinery cost - Salvage value) / Useful life = ($320,000 - $0) / 5 = $64,000

Project Z:

Depreciation (using straight line method) = ($320,000 - $0) / 4 = $80,000

Answer 2:

Answer 3:

Answer 4: