Applying payback period, accounting rate of return, and net present value

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 uses straight-line depreciation, and cash flows occur evenly throughout each year.

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 uses straight-line depreciation, and cash flows occur evenly throughout each year. Project A $250,000 Project B $200,000 Annual Amounts Sales ........ Expenses Direct materials Direct materials Overhead including depreciation Selling, general, and administrative expenses Total expenses Pretax income Income taxes (30%) Income 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 Required 1 Compute each project's annual net cash flows. (Round net cash flows to the nearest dollar) 2a. Compute each project's payback period. (Round the payback period to two decimals.) 2b. If the company bases investment decisions solely on payback period, which project will it choose and why? 3a. Compute each project's accounting rate of return. (Round the percentage return to one decimal place). 3b. If the company investment decisions solely on accounting rate of return, which project will it choose and why? 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? 5 Identify the project you would recommend to management; explain your choice