Most Company has an opportunity to invest in one of two new projects. Project Y requires a $305,000 investment for new machinery with a six year life and no salvage value. Project Z requires a $305,000 investment for new machinery with a five year life and no salvage value. The two projects yield the following predicted annual results. The company uses straight line depreciation, and cash flows occur evenly throughout each year.
| Project Y | Project Z | |||||||||
| Sales | $ | 385,000 | $ | 325,000 | ||||||
| Expenses | ||||||||||
| Direct materials | 53,900 | 40,625 | ||||||||
| Direct labor | 77,000 | 48,750 | ||||||||
| Overhead including depreciation | 138,600 | 146,250 | ||||||||
| Selling and administrative expenses | 28,000 | 29,000 | ||||||||
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| Total expenses | 297,500 | 264,625 | ||||||||
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| Pretax income | 87,500 | 60,375 | ||||||||
| Income taxes (32%) | 28,000 | 19,320 | ||||||||
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| Net income | $ | 59,500 | $ | 41,055 | ||||||
1. Compute each project’s annual expected net cash flows.
Project Y | Project Z
Net Income: |
Depreciation Expense: |
Expected Net Cash Flows: |
2. Determine each project’s payback period.
“Numerator”/”Demominator” = Payback Period
Project Y / =
Project Z / =
3. Compute each project’s accounting rate of return.
“Numerator”/”Demominator” = Accounting Rate of Return
Project Y / =
Project Z / =
4.Determine each project’s net present value using 10% as the discount rate. Assume that cash flows occur at each year end.
Project Y
Chart values are based on: n= i=
Select Chart Amount X Table Factor = Present Value
Net Present Value =
Project Z
Chart values are based on: n= i=
Select Chart Amount X Table Factor = Present Value
Net Present Value =