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 $500,000 cost with an expected four-year life and a $22,000 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. FV of $1. PVA of $1, and EVA of $1 (Use appropriate factor(s) from the tables provided. Round PV factor value to 4 decimal places.) $1,898,eee Expected annual sales of new product Expected annual costs of new product Direct materials Direct labor Overhead (excluding straight-line depreciation on new machine) Selling and administrative expenses Income taxes 482,000 674, eee 356, eee 162,00 30x 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 4% 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.) Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5 Compute straight-line depreciation for each year of this new machine's life. Straight-line depreciation < Required 1 Required 2 >

Answer 1

Required 1 Stright line depreciation $ 1,19,500 Depreciation Cost of the machine - Salvage value Estimated useful life $500,000 - $22,000 $ 4,78,000 = $1,19,500 $ 18,90,000 Required 2 Expected Net Income Revenues Expected annual sales of new product Expenses Direct materials Direct labor Direct overhead Depreciation on machinery Selling and administrative expenses Income before tax Less: Income tax @30% ($96,500 X 30%) Net Income Expected Net Cash Flow Net Income Add: Depreciation Cash inflow after tax 4,82,000 6,74,000 3,56,000 1,19,500 1,62,000 $ 17,93,500 96,500 28,950 67,550 $ 67,550 1,19,500 1,87,050 $

Required 3 Payback period Choose Numarator Choose Denumarator = | Initial Investment / Annual Net Cash Inflows = | 5,00,000 / $ 1,87,050 = Payback period Payback period 2.67 Years $ Payback period Initial Investment Annual Net Cash Inflows 5,00,000 1,87,050 2.67 Years Required 4 Accounting rate of return Choose Numarator / Choose Denumarator = Accounting rate of return Annual net income A Average investment = Accounting rate of return 67,550 / $ 2,61,000 $ 26% Accounting rate of return Annual net income Average investment 67,550 2,61,000 Average investment Initial Investment + Salvage value $500,000 + $ 22,000 522000 2,61,000

Required 5 Chart Values are Based on: n= Select Chart Cash Flow Annual cash flow Residual value 4 4% Amount x PV Factor = Present Value $7,70,200 x $ 6,97,720.08 $5,00,000 x $ 5,00,000.00 $1,97,720.08 Net present value

E ДА B C D 1 Year Cash inflow PVIF at 4% Present Value 2 1 1,87,050 0.9615 1,79,848.58 3 2 1,87,050 0.9245 1,72,927.73 1,87,050 0.8889 1,66,268.75 54 | 2,09,050 0.8547 1,78,675.04 Present Value of total cash inflows $ 6,97,720.08 Cash outflows 0 $ 5,00,000.00 1 $ 5,00,000.00 Present Value of total cash outflow $ 5,00,000.00 10 Net Present Value $ 1,97,720.08 11 covo AWN- 12

F 1 2 3 4 5 6 A Year Cash inflow PVIF at 4% Present Value 1 1,87,050 0.9615 =B2*C2 2 1,87,050 0.9245 =B3*C3 3 1,87,050 0.8889 =B4*C4 4 2,09,050 0.8547 =B5*C5 Present Value of total cash inflows =SUM(D2:05) Cash outflows 0 $ 5,00,000.00 1 L =B8C8 Present Value of total cash outflow =D8 Net Present Value D6-09 8