Most Company has an opportunity to invest in one of two new projects. Project Y requires…
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Question “Most Company has an opportunity to invest in one of two new projects. Project Y requires…”
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $315,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $315,000 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. (PV of $1. FV of $1. PVA of $1. and FVA of $1 ) (Use appropriate factor(s) from the tables provided.) Project Y Project Z $370,000 $296,000 Sales Expenses Direct materials Direct labor Overhead including depreciation Selling and administrative expenses Total expenses Pretax income Income taxes (28%) Net income 51,800 74,000 133,200 26,800 285,000 85,000 23,800 $ 61,200 37,000 44,400 133,200 26,000 240,600 55,400 15,512 $ 39,888 Required: 1. Compute each project’s annual expected net cash flows. Project Y Project Z
2. Determine each project’s payback period. Payback Period Choose Numerator: Choose Denominator: Payback Period = Payback period = 0 = 0 Project YT Project z
3. Compute each project’s accounting rate of return. Accounting Rate of Return Choose Denominator: Choose Numerator: Accounting Rate of Return Accounting rate of return Project Y Project Z
4. Determine each project’s net present value using 9% as the discount rate. Assume that cash flows occur at each year-end. (Round your intermediate calculations.) Project Y Chart values are based on: Select Chart Amount X PV Factor = Present Value Net present value Project Z Chart values are based on: Select Chart Amount X PV Factor Present Value Net procent value
Answer
1)
Project Y | Project Z | |
Net income | 61200 | 39888 |
Add:Depreciation (non cash) | 63000 [315000/5] | 78750 [315000/4] |
Net cash flow | 124200 | 118638 |
2)
PAYBACK PERSISTANCE | |||||
Initial investment | / | Net cash flow | = | Payback period | |
Y | 315000 | 124200 | 2.54 | ||
Z | 315000 | 118638 | 2.66 |
3)
ACCOUNTING RATE of RETURN | |||||
Net income | / | Average investment | = | Accounting rate of return | |
Y | 61200 | 157500 | 38.86% | ||
Z | 39888 | 157500 | 25.33% |
**Average investment = [Beginning Book Value +Ending Book Value]/2
= [315000+0]/2
=157500
4)
Project Y | |||||
Chart values are calculated using | |||||
n | 5 | ||||
i | 9% | ||||
Select chart | The amount | * | PV factor | = | present value |
Present value of annuity | 124200 | PVA9%,5 3.88965 | 483094.53 | ||
Current value of annuity | 483094.53 | ||||
Less: Initial investment | -315000 | ||||
Net present value | 168094.53 | ||||
Project Z | |||||
Chart values are calculated using | |||||
n | 4 | ||||
i | 9% | ||||
Select chart | The amount | * | PV factor | = | present value |
Present value of annuity | 118638 | PVA9%,4 3.23972 | 384353.90 | ||
Current value of annuity | 384353.90 | ||||
Less: Initial investment | -315000 | ||||
Net present value | 69353.90 |
Conclusion
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