Question

Required information Problem 11-2A Analyzing and computing 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 $345.000 investment for new machinery with a four-yex life and no salvage value. Project Z requires a $345,000 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 EVA of $1 ) (Use appropriate factor(s) from the tables provided.) Project Y Project 2 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 (308) 25.050 16,290 $ 58,450 $ 38,010 Net income

Accounting rate of return for Project Y is 33.9% and 22% for project Z. Payback period is 2.38 years for Project Y and 2.25 years project Z

Answer 1

1. Net annual Cash Inflow
	Project Y	Project Z
Net Income	$58450	$38010
Add: Dep.	$86250	$115000
Net Annual Cash Inflow	$144700	$153,010

Project Y
Chart values are based on:
n =	4
i =	8%
Select Chart	Amount	x	PV Factor	=	Present Value
Present Value of an Annuity of 1	144,700		3.312	=	$479246
Present value of cash inflows		479,246
Present value of cash outflows		345,000
Net present value		134,246
Project Z
Chart values are based on:
n =	3
i =	8%
Select Chart	Amount	x	PV Factor	=	Present Value
Present Value of an Annuity of 1	153,010		2.577	=	$394307
Present value of cash inflows		$394307
Present value of cash outflows		345,000
Net present value		$49307