Question
Garca Company can invest in one of two alternative projects. Project Y requires a $430,000 initial investment for new machinery with a four-year life and
Garca Company can invest in one of two alternative projects. Project Y requires a $430,000 initial investment for new machinery with a four-year life and no salvage value. Project Z requires a $474,000 initial investment for new machinery with a three-year life and no salvage value. The two projects yield the following annual results. Cash flows occur evenly within each year. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)
| Annual Amounts | Project Y | Project Z |
|---|---|---|
| Sales of new product | $ 480,000 | $ 442,000 |
| Expenses | ||
| Materials, labor, and overhead (except depreciation) | 225,000 | 202,000 |
| DepreciationMachinery | 107,500 | 158,000 |
| Selling, general, and administrative expenses | 63,000 | 51,000 |
| Income | $ 84,500 | $ 31,000 |
Required: 1. Compute each projects annual net cash flows. 2. Compute each projects payback period. If the company bases investment decisions solely on payback period, which project will it choose? 3. Compute each projects accounting rate of return. If the company bases investment decisions solely on accounting rate of return, which project will it choose? 4. Compute each projects net present value using 7% as the discount rate. If the company bases investment decisions solely on net present value, which project will it choose?
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Accounting
Authors: Carl s. warren, James m. reeve, Philip e. fess
21st Edition
978-0324400205, 324225016, 324188005, 324400209, 9780324225013, 978-0324188004
