shahimermaidMost Company has an opportunity to invest in one of two new projects. Project Y requires a $305,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $305,000 investment for new machinery with a four-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. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
| Project Y | Project Z | ||||||||||
| Sales | $ | 375,000 | $ | 320,000 | |||||||
| Expenses | |||||||||||
| Direct materials | 52,500 | 40,000 | |||||||||
| Direct labor | 75,000 | 48,000 | |||||||||
| Overhead including depreciation | 135,000 | 144,000 | |||||||||
| Selling and administrative expenses | 27,000 | 29,000 | |||||||||
| Total expenses | 289,500 | 261,000 | |||||||||
| Pretax income | 85,500 | 59,000 | |||||||||
| Income taxes (30%) | 25,650 | 17,700 | |||||||||
| Net income | $ | 59,850 | $ | 41,300 |
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Compute each project’s annual expected net cash flows. Determine each project’s payback period. Compute each project’s accounting rate of return.
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10 years ago
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