Question

Saved Problem 24-1A 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 $560,000 cost with an expected four-year life and a $28,000 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. EV of $1. PVA of S1, and EVA 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 Overhead (excluding straight-line depreciation on new machine) Selling and administrative expenses Income taxes $2,040,000 488,000 680,000 416,000 168,000 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.) Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required S Compute straight-line depreciation for each year of this new machine's life. Straight line depreciation Requirad 1 Required 2

Answer 1

Requirement 1:

Initial Investment = $560,000
Salvage Value = $28,000
Useful Life = 4 years

Annual Depreciation = (Initial Investment - Salvage Value) / Useful Life
Annual Depreciation = ($560,000 - $28,000) / 4
Annual Depreciation = $133,000

Answer 2.

$ 2,040,000 Expected Net Income Revenues Sales Expenses Direct materials Direct labor Overhead excluding depreciation Selling and administrative expenses Depreciation Total expenses Income before taxes Income tax expense Net income Expected Net Cash Flow Net income Depreciation Net cash flow 488,000 680,000 416,000 168,000 133,000 $ $ $ $ $ 1,885,000 155,000 46,500 108,500 $ $ $ 108,500 133,000 241,500

Answer 3.

Payback Period = Cost of Investment / Annual Net Cash Flow
Payback Period = $560,000 / $241,500
Payback Period = 2.32 years

Answer 4.

Annual Average Investment = (Initial Investment + Salvage Value) / 2
Annual Average Investment = ($560,000 + $28,000) / 2
Annual Average Investment = $294,000

Accounting Rate of Return = Annual Net Income / Annual Average Investment
Accounting Rate of Return = $108,500 / $294,000
Accounting Rate of Return = 36.90%

Answer 5.

Cash Flow Annual cash flow Residual value Chart Values are Based on: n = 3.00% Select Chart Amount PVA of $1 $ 241,500.00 PV of $1 $ 2,800.00 Present value of cash inflows Present value of cash outflows Net present value x x x PV Factor = 3.7171 = 0.8885 = = = = Present Value $ 897,679.65 $ 2,487.80 $ 900,167.45 $ -560,000.00 $ 340,167.45