Factor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $499,000 cost with an expected four-year life and a $11,000 salvage value. All sales are for cash, and all costs are out-of-pocket, except for depreciation on the new machine. Additional information includes the following. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) $1,850,000 Expected annual sales of new product Expected annual costs of new product Direct materials Direct labor Overhead (excluding straight-line depreciation on new machine) Selling and administrative expenses Income taxes 465,000 676,000 336,000 172,000 36% Required: 1. Compute straight-line depreciation for each year of this new machine's life. 2. Determine expected net income and net cash flow for each year of this machine's life. 3. Compute this machine's payback period, assuming that cash flows occur evenly throughout each year. 4. Compute this machine's accounting rate of return, assuming that income is earned evenly throughout each year. 5. Compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year-end. (Hint. Salvage value is a cash inflow at the end of the assets life.) Required 1 Required 2 Required 3 Required 4 Required 5 Determine expected net income and net cash flow for each year of this machine's life. Expected Net Income Revenues $ 1,850,000 Sales Expenses Direct materials $ 465,000 Direct labor 676,000 122,000 Straight-line depreciation on new machine Overhead excluding straight-line depreciation on new machine Selling and administrative expenses 336,000 172,000 Total expenses 1,771,000 Income before taxes Income tax expense Net income Expected Net Cash Flow Net income Net cash flow Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5 Compute this machine's payback period, assuming that cash flows occur evenly throughout each year. Payback Period Choose Numerator: 1 Choose Denominator: = Payback Period = Payback period | Annual net cash flow 499,000/ = 0 Required 1 Required 2 Required 3 Required 4 Required 5 Compute this machine's accounting rate of return, assuming that income is earned evenly throughout each year. Accounting Rate of Return Choose Numerator: 1 Choose Denominator: = Accounting Rate of Return Accounting rate of return / Annual average investment = 0 Required 1 Required 2 Required 3 Required 4 Required 5 Compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the asset's life.) (Do not round intermediate calculations. Amounts to be deducted should be indicated by a minus sign.) Chart Values are Based on: n = 4 i = % Cash Flow Select Chart Amount PV Factor Present Value Annual cash flow Present Value of an Annuity of 1 $ 0 = = Residual value Present Value of 1 $ 11,000 x 0 Present value of cash inflows Present value of cash outflows (499,000) Net present value
