Question

Savod Help Most Company has an opportunity to invest in one of two new projects Project Y requires a $345.000 investment for new machinery with a five-year life and no salvage value Project Z requires a $345,000 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. (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 $400,000 $320,000 Sales Expenses Direct materials Direct labor Overhead including depreciation Selling and administrative expenses Total expenses Pretax income Income taxes (28%) Net income 56,000 80,000 144,000 29,000 309,000 91,000 25,480 $ 65,520 49,800 48,000 144,000 29,eee 261,000 59,00 16,529 $ 42,480 3. Compute each project's accounting rate of retum. Accounting Rate of Return Choose Denominator: Choose Numerator: Accounting Rate of Return Accounting rate of return Project Y Project 2

Answer 1

Choose Numerator: Average net income $65,520 $42,480 Accounting Rate of Return Choose Denominator: Average investment $172,500 $172,500 Accounting Rate of Return Accounting Rate of Return 37.98% 24.63% Project Y Project Z Workings: As straight-line depreciation method is used, annual net income for each project will be average net income. Average investment amount = (Amount of initial investment + Salvage value at the end) / 2 Project Y Project Z Amount of initial investment $345,000 $345,000 Salvage value at the end $0 $0 Average investment amount $172,500 $172,500 [For both projects, Average investment amount = ($345000 + $0)/2 = $172500]