Question

it View History Bookmarks People Window Help US-18-4302 XCh. 11 Homework D Thu 11:01 PM //newconnect.mheducation.com/flow/connect.htm ework Help Save & Exit Submi Problem 11-1A Computation of payback period, accounting rate of return, and net present value LO P1, P2, P3 Factor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $480,000 cost with an expected four-year life and a $20,000 salvage value. 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 $t. PVA of $1, and EVA of $1) (Use appropriate factor(s) from the tables provided.) Expected annual sales of new product Expected annual costs of new product Direct materials Direct labor 480,000 672,000 336,000 160,000 308 overhead (excluding straight-line depreciation on new machine) Selling and administrative expenses Income taxes 5. compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year-en (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 the net resent value for this machine usina a discount rate of 7% and assumina that cash flows occur at each vear- ucalor.cu/HoW)connect.html ork Saved Help Save&Exit Check m Required i Required 2 Required 3 Required 4 Required 5 Compute the net present valu end. (Hint: Salvage value is a cash inflow at the end of the asset's life.) (Do not round intermediate be deducted should be indicated by a minus sign.) for this machine using a discount rate of 7% and assuming that cash flows occur at each year calculations. Amounts to Chart Values are Based on n s Amountx PV FactorPresent Value S 168,900 x Select Chart 0.00 t Value of an Annuity of 1 Residual value t Value of 1 Present value of cash inflows Present value of cash outflows Net present value Required 4 Next> K Prev 5 of 9

Answer 1

Annual depreciation of the machine = (Initial cost – Salvage value)/Useful life

                                                               = ($ 480,000 - $ 20,000)/4

                                                               = $ 460,000/4 = $ 115,000

Computation of annual cash inflow:

Sales	$1,840,000
Less: Cost
Direct materials	$480,000
Direct labor	$672,000
Overhead	$336,000
Selling & admin.	$160,000
Total cost	$1,648,000
Gross income	$192,000
Less: Depreciation	$115,000
Income before tax	$77,000
Tax @ 30%	$23,100
Net income	$53,900
Add: Depreciation	$115,000
Annual cash flow	$168,900

Computation of NPV:

	n=	4
	i=	7%
Cash Flow	Select Chart	Amount	x	PV Factor	=	Present Value
Annual cash flow	Present value of an annuity of 1	$168,900	x	3.3872	=	$ 572,098.08
Residual value	Present value of 1	$20,000	x	0.7629	=	$ 15,258.00
	Present value of cash inflow					$ 587,356.08
	Present value of cash outflow					- $ 480,000.00
	Net present value					$ 107,356.08