Question

actor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine $880,000 cost with an expected four-year life and a $60,000 salvage value. All sales are for cash, and all costs are out-of-pocket, xcept for depreciation on the new machine Additional information includes the following. (PV of $1.FV of $1. PVA of S1. 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 Expected annual costs of new product Direct materials Direct labor $2,840,0ee 520,869 712,080 736,800 200,000 30% Overhead (excluding straight-line depreciation on new machine) Selling and administrative expenses Income taxes 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.) Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3Required 4 Required 5 Required 1 Required 2 Required 3 Required 4Required 5 Determine expected net income and net cash flow for each year of this machine's life. xpected Net Income Expenses xpected Net Cash Flow Hint Salvage value is a cash inflow at the end of the asset's life) Complete this question by entering your answers in the tabs below. Required 3 Required 4 Required 5 Required 1 Required 2 Compute this machine's payback period, assuming that cash flows occur evenly throughout each year Payback Period Choose Numerator:! Choose Denominator: Payback Period Payback period Required 4 Required 2 Prav 6 of9l Next . 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) Complete this question by entering your answers in the tabs below Required 1 Required 2 Required 3 Required 4 Required 5 Compute this machine's accounting rate of return, assuming that income is earned evenly throughout each year Accounting Rate of Return Choose Numerator: Choose Denominato: Accounting Rate of Return Accounting rate of return Required 3 Required 5 K Pre 6of 9 Next Complete this question by entering your answers in the tabs below. Required 1Required 2 Required 3 Required 4Required 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.) (Do not round intermediate calculations. Amounts to be deducted should be indicated by a minus sign.) Chart Values are Based on: Cash Flow Select Chart nount Annual cash flow Residual value Net present value C Required 4 Prev6 of 9 Next

Answer 1

Solution:

Cost of the Machine = $880,000

Solution 1) Calculation of Straight Line Depreciation for each year of new machine

Depreciation as per Straight Line Method = (Cost – Scrap value) / No of years

                                                                            =    ($880,000-$60,000) / 4

                                                                           = $205,000 per year

Straight Line Depreciation for each year of new machine is $205,000

Solution 2) Calculation of Expected Net Income and Net Cash flow for each year of the machine’s life

	Year 1	Year 2	Year 3	Year 4
Expected Sales	28,40,000.00	28,40,000.00	28,40,000.00	28,40,000.00
Less: Annual Costs
Direct Material	5,20,000.00	5,20,000.00	5,20,000.00	5,20,000.00
Direct Labour	7,12,000.00	7,12,000.00	7,12,000.00	7,12,000.00
Overheads Excluding Depreciation	7,36,000.00	7,36,000.00	7,36,000.00	7,36,000.00
Depreciation	2,05,000.00	2,05,000.00	2,05,000.00	2,05,000.00
Selling and Administrative Expenses	2,00,000.00	2,00,000.00	2,00,000.00	2,00,000.00
Total Costs	23,73,000.00	23,73,000.00	23,73,000.00	23,73,000.00
Net Profit before Tax = Expected Sales - Total Costs	4,67,000.00	4,67,000.00	4,67,000.00	4,67,000.00
Less: Tax 30%	1,40,100.00	1,40,100.00	1,40,100.00	1,40,100.00
Net Profit after tax	3,26,900.00	3,26,900.00	3,26,900.00	3,26,900.00
Add: Depreciation	2,05,000.00	2,05,000.00	2,05,000.00	2,05,000.00
Net Cash Flows	5,31,900.00	5,31,900.00	5,31,900.00	5,91,900.00

The Expected Net Income is $326,900 every year and Net Cash flow is $531,900 for First, Second and Third year and $591,900 for Fourth year as Scrap value of the Machine $60,000 will also be received at the end of Fourth year.

Solution 3) Calculation of Payback Period of the Machine

Year	Net Cash Flows $
1	5,31,900.00
2	5,31,900.00
3	5,31,900.00
4	5,91,900.00

PayBack Period = Initial Investment / Annual Net Cash Flows

                           = $880,000 / $531,900 = 1.65 Years

Solution 4) Calculation of Accounting Rate of Return

ARR = (Average Annual Profit After tax / Average Investment) x 100

Where, Average Investment = ½(Initial Cost + Installation Expenses – Salvage Value) + Salvage Value

Average Investment =1/2(880,000 + 0 – 60,000) + 60,000

= $470,000

Average Annual Profit After tax = $326,900

Therefore, ARR = $326,900 / $470,000 x 100

= 69.55%

Accounting Rate of Return of the Machine is 69.55%

Solution 5) Calculation of Net Present Value of the machine

Cash Flow	Amount $	x	PV Factor	Present Value $
Annual Cash Flow	5,31,900.00	x	3.717098	19,77,124.64
Residual Value	60,000.00	x	0.888487	53,309.22
	Present Value of Cash Inflows			20,30,433.86
	Less: Cost of the Machine			8,80,000.00
	Net Present Value			11,50,433.86

The Net Present Value of the Machine is $1,150,433.86