2 Part 1. Applying payback period, accounting rate of return, and net present value (25 points) 3 4 Brown Co. can invest in one of two alternative projects. Project A requires a $240,000 initial investment for new machinery with a four-year life and no salvage value. Project B requires a $240,000 initial investment for new machinery with a three-year life and no salvage value. The two projects yield the following predicted annual results. The company 5 uses straight-line depreciation, and cash flows occur evenly throughout each year. 5 Annual Amounts 7 Project A $250,000 Project B $200,000 3 $ $ 1 2 Sales Expenses Direct materials Direct materials Overhead including depreciation Selling, general, and administrative expenses Total expenses Pretax income Income taxes (30%) Income 3 35,000 50,000 90,000 18,000 193,000 57,000 17,100 39,900 25,000 30,000 90,000 18,000 163,000 37,000 11,100 25,900 1 5 5 7 $ $ 3 29 Required 30 1 Compute each project's annual net cash flows. (Round net cash flows to the nearest dollar) 31 32 2a. Compute each project's payback period. (Round the payback period to two decimals.) 33 2b. If the company bases investment decisions solely on payback period, which project will it choose and why? 34 35 3a. Compute each project's accounting rate of return. (Round the percentage return to one decimal place). 3b. If the company bases investment decisions solely on accounting rate of return, which project will it choose and why? 36 37 38 4a. Compute each project's net present value using 8% as the discount rate. For part 4 only, assume that cash flows occur at each year-end. (Round net present values to the nearest dollar). 4b. If the company bases investment decisions solely on net present value, which project will it choose and why? 39 40 41 5 Identify the project you would recommend to management; explain your choice. 42 43 Part 2: Comparative Analysis (15 points) Information on assumed capital investments in the current year for Google and Apple follow: $ billions Google $(2.42) 15% Apple $(2.12) 10% Initial investment Required internal rate of return on investmer Useful Life Annual Cash Flows 7 years 10 years ? ? Required 1 Using the information provided, calculate the amount of annual cash flows that Google and Apple must earn from these projects to achieve their respective internal rate of return. 2 Locate and access Google's and Apple's financial statements for the fiscal year ended 2017 (also known as, annual reports Form10-K). Refer to Google's 2017 financial statements and identify the actual amount that Google invested in capital assets for the year 2017. Refer to Apple's 2017 financial statements and identify the actual amount that Apple invested in capital assets for the year 2017. a. Which company invested more in capital assets in 2017. Hint: The SEC maintains the EDGAR (Electronic Data Gathering, Analysis, and Retrieval) database at SEC.gov for U.S. filers. The Form 10-K is the annaul report form for most companies. You may access the annual reports directly from the company's website as well (usually under Investor relations)