Question

Most Company has an opportunity to invest in one of two new projects. Project Y requires a $340,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $340,000 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 S1, FV of $1, PVA of $1, and FVA of $) (Use appropriate factor(s) from the tables provided.) Sales Expenses Project Y Project $365,000 $292,808 Direct materials Direct labor Overhead including depreciation Selling and administrative expenses 51,100 36,500 73,000 43,800 131,400 131,400 26.000 26,000 281,500 237,700 83,500 54,30e 33,400 21,720 Total expenses Pretax income Income taxes (40%) Net income $ 50,100 32,580 くPrev 1 2. 3 4 | of 4 11 Next > arch 99+ ALLF N W AR E

Answer 1

Q1 Net Cash Flow

	Project Y	Project Z
Income	50100	32580
Depreciation()	=(340000 - 0)/5 =68000	=(340000 - 0)/4 =85000
Income + Depreciation = Net	118100	117580

Q2 Payback Period

Project	Numerator (Investment)	/	Denominator (Net Cash Flow)	Payback Period
Y	340000	/	118100	2.88 years ~ 2 years 321 days
Z	340000	/	117580	2.89 years ~ 2 years 326 days

Q3 Accounting Rate of Return

Project	Numerator (Net Income)	/	Denominator (Average Investment)	Accounting Rate of Return
Y	50100	/	170000	0.295 ~ 29.5%
Z	32580	/	170000	0.192 ~ 19.2%

Q4 Net Present Value (7% Discount Rate)

Project Y

Year	Cash Flow	Discount Factor - 7%	Present Value
0	(340000)	1	(340000)
1	118100	0.934579439	110373.83
2	118100	0.873438728	103153.11
3	118100	0.816297877	96404.78
4	118100	0.762895212	90097.93
5	118100	0.712986179	84203.67
			144233.32

Project Z

Year	Cash Flow	Discount Factor - 7%	Present Value
0	(340000)	1	(340000)
1	117580	0.934579439	109887.85
2	117580	0.873438728	102698.93
3	117580	0.816297877	95980.30
4	117580	0.762895212	89701.22
5	117580	0.712986179	83832.92
			142101.20

I hope this helps. Please feel free to ask any further queries.

Thank You