Question

TBQ Enterprises will add a new product (Product M) to its production. To manufacture Product M, the company will have to purchase a new machine costing $840,000. The machine has an expected life of four years and salvage value of $56,000. All sales are for cash, and all costs are out-of-pocket, except for depreciation on the new machine. Additional information includes the following. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Round PV factor value to 4 decimal places.)

Expected annual sales of new product $ 2,740,000 Expected annual costs of new product Direct materials 516,000 Direct labor 708,000 Overhead (excluding straight-line depreciation on new machine) 696,000 Selling and administrative expenses 196,000 Income taxes 30 %

Required:

1. Compute straight-line depreciation for each year of this new machine’s life. 2. Determine expected net income and net cash flow for each year of this machine’s life. 3. Compute this machine’s payback period, assuming that cash flows occur evenly throughout each year. 4. Compute this machine’s accounting rate of return, assuming that income is earned evenly throughout each year. 5. Compute the net present value for this machine using a discount rate of 3% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the asset’s life.)

Answer 1