Question

Problem 25-2A Analysis and computation of 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 $315,000 investment for new machinery with a six-year life and no salva five-year life and no salvage value. The two projects yield the following predicted annual results. The company uses ge value. Proj quires a $315,000 invest ect Z re ment for new machinery with a 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 2 $390,000 $312,000 Sales 54,600 39,000 78,000 46,800 140,400 140,400 28,000 Direct labor Overhead including depreciation Selling and administrative expenses 28,000 301,000 254,200 57,800 17,340 89,000 26,700 Pretax income Income taxes (308) s 62,300 40,460 roblem 25-2A Part 1 Required . Compute each project's annual expected net cash flows. oject Y Project Z

Answer 1

Project Y
Calculation of net cash flow
Annual cash flow = Net income+depreciation
Depreciation = Initial investment-salvage value/expected life of project
Depreciation = 315000/6 = 52500
Project Z
Depreciation = 315000/5yr =63000
Particulars			Project Y	Project Z
Net income			62300	40460
Add: Depreciation			52500	63000
Annual Expected net cash flows			114800	103460

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