Garcia Company can invest in one of two alternative projects. Project Y requires a $420,000 initial investment for new machinery with a four-year life and no salvage value. Project Z requires a $450,000 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.) Project Y $ 470,000 Project 2 $ 438,000 Annual Amounts Sales of new product Expenses Materials, labor, and overhead (except depreciation) Depreciation-Machinery Selling, general, and administrative expenses Income 215,000 105,000 59,000 $ 91,000 198,000 150,000 49,000 $ 41,000 Required: 1. Compute each project's annual net cash flows. 2. Compute each project's payback period. If the company bases investment decisions solely on payback period, which project will it choose? 3. Compute each project's accounting rate of return. If the company bases investment decisions solely on accounting rate of return, which project will it choose? 4. Compute each project's net present value using 8% as the discount rate. If the company bases investment decisions solely on net present value, which project will it choose? Required 1 Required 2 Required 3 Required 4 Compute each project's annual net cash flows. Annual Amounts Project Y Income Cash Flow 470,000 $ 470,000 Project Z Income Cash Flow $ Sales of new product Expenses Materials, labor, and overhead (except depreciation) DepreciationMachinery Selling, general, and administrative expenses Income 215,000 105,000 59,000 91,000 198,000 150,000 49,000 $ Net cash flow Required 1 Required 2 Required 3 Required 4 Compute each project's payback period. If the company bases investment decisions solely on payback period, which project will it choose? Payback Period Denominator: Numerator: - Payback period = Project Y Project Z If the company bases investment decisions solely on payback period, which project will it choose? Required 1 Required 2 Required 3 Required 4 Compute each project's accounting rate of return. If the company bases investment decisions solely on accounting rate of return, which project will it choose? Accounting Rate of Return Denominator: Numerator: Accounting rate of return Project Y Project Z If the company bases investment decisions solely on accounting rate of return, which project will it choose? Required 1 Required 2 Required 3 Required 4 Compute each project's net present value using 8% as the discount rate. If the company bases investment decisions solely on net present value, which project will it choose? (Do not round intermediate calculations. Round your present value factor to 4 decimals and final answers to the nearest whole dollar.) Project Y Present Value Net Cash Flows * of Annuity at 8% Present Value of Net Cash Flows Years 1-4 Net present value Project Z Present Value Net Cash Flows x of Annuity at 8% = Present Value of Net Cash Flows Years 1-3 Net present value If the company bases investment decisions solely on net present value, which project will it choose
