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Problem 25-2A Analysis and computation of payback period, accounting rate of return, and net present value LO P1, P2, P3

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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, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

	Project Y				Project Z
Sales		$	390,000			$	312,000
Expenses
Direct materials			54,600				39,000
Direct labor			78,000				46,800
Overhead including depreciation			140,400				140,400
Selling and administrative expenses			28,000				28,000
Total expenses			301,000				254,200
Pretax income			89,000				57,800
Income taxes (36%)			32,040				20,808
Net income		$	56,960			$	36,992

2. Determine each project’s payback period.

3. Compute each project’s accounting rate of return.

Answer 1

Payback period = Initial investment / Annual cash inflows Accounting rate of return = Average net profit / average investment Particulars Net income Depreciation Cash inflows Initial investment Average investment Payback period = Accounting rate of return Project - X $ 56,960 $ 83,750 $140,710 $335,000 $167,500 2.4 Years 34 % Project - Y $ 36,992 $ 83,750 $120,742 $335,000 $167,500 2.8 Years 22 % >> Please provide feedback with up vote