Question

Problem 25-1A 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 $800,000 cost with an expected four-year life and a $52,000 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 $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Round PV factor value to 4 decimal places.) $ 2,640,000 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 512,000 704,000 656,000 192,000 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.

Answer 1

Answer Page: No O slaaight line depreciation each yeah Cart of new machine – straight line depreciatico each year = Salvage value atend 9 4 oschiul life 800,000 - 52000 4 years = $184000 Fistonight line depreciation each year = €137000 Expected net income , income after tage and pret cash floring for cach yo Total expenses : 512000 + 404000 + 656000 + 192000 + 187000 $2251000 Revenues -- sales = $ 2640,000

Page, wo @ Amount $2640,000 Particular Revenues - Sales Expenses :- Direct material Direct labor Overheads Selling and administrative expenses Depreciation Frotal expenses Net operating income Income tax @ 30%. Income after tax Depreciation Annual cash flocie ☺ cash payback period of machine Cash payback period of machine = $512000) (4 404000) (4656000) 0192000) (* 187000) ($2251000) $389000 ($116700) $242300 $184000 $ 459300 Tribial investment 3 Annual cash flowee 800,000 -1.74 459300

Page No ③ 1.: cash payback period of machine = 1074 @ Acounting rate of return Net operating income bebove tax = $389000 Average investment Purchase corf of equipoent + sabage valice 800,000 + 52000 = $426000 Accounting rate oclurn a Net operating income before fax . Average investment 389000 - X100 4 26000 = 91.31% ② .: Accounting orabe of oreturn = 91.317. let a preventint value Discount viate, o = 3%

Page, wo @ n = 4 years 07= 30%. 1- 1 +371 PV factor of annual cash flows = ? - 3% = 31414! PV factor of salvage value = y = 0.8885 (1737) | Present value $1409064 $ 46202 cash flow select chart Amount / pv factor Annual cash flow pua of $1459300 314191 salvage value at end of pv gf $1 520000.8885 - 4 years Present value of future cash flows Tnitial investment (const of new machine) - Net present value $1453466 (4800,000) $ 953466