Question

Required information [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 $305,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $305,000 investment for new machinery with a five-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.) Part 1 of 4 Project Y Project z $360,000 $288,000 Sales Expenses Direct materials Direct labor Overhead including depreciation Selling and administrative expenses 36,000 43,200 129,600 129,600 26,000 278,000 234,800 53,200 15,960 50,400 72,000 26,000 82 , 000 Total expenses Pretax income Income taxes (30%) Net income 24,600 $ 57,400 37,240 Required 1. Compute each project's annual expected net cash flows. Project Y Project Z

Answer 1

	Y	Z
Sales	360,000	288,000
Expenses
Direct materials	50,400	36,000
Direct labor	72,000	43,200
Overhead including depreciation	129,600	129,600
Selling and administrative expenses	26,000	26,000
Total expenses	278,000	234,800
Pretax income	82,000	53,200
Income taxes (30%)	24,600	15,960
Net income	57,400	37,240
investment	305000	305000
life	6	5
Depreciation expense	50,833.33	61,000.00
Ques 1
	project Y	project Z
Net income	$          57,400	$          37,240
Depreciation expense	$          50,833	$          61,000
expected net cash flows	$        108,233	$          98,240
Ques 2
	Numerator	Denominator	Payback period
	cost of investment	annual net cah flow
project Y	305000	$        108,233	2.82	years
project Z	305000	$          98,240	3.10	years
Ques 3
	Numerator	Denominator	ARR
	annual after tax net income	annual average investment
project Y	57,400	$        152,500	37.6%
project Z	37,240	$        152,500	24.4%