Garcia Company can invest in one of two alternative projects. Project Y requires a $480,000 initial investment for new machinery with a four-year life and no salvage value. Project Z requires a $468,000 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 $ 460,000 Project z $ 560,000 Annual Amounts Sales of new product Expenses Materials, labor, and overhead (except depreciation) Depreciation-Machinery Selling, general, and administrative expenses Income 202,000 120,000 62,000 $ 76,000 212,000 156,000 62,000 $ 130,000 Required: 1. Compute each project's 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 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. Project Y Project Z Annual Amounts Income Cash Flow Income Cash Flow $ 460,000 $ 460,000 Sales of new product Expenses 212,000 Materials, labor, and overhead (except depreciation) Depreciation Machinery Selling, general, and administrative expenses 202,000 120,000 156,000 62,000 62,000 Income $ 76,000 $ (430,000) Net cash flow $ 460,000 $ 0 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 Payback Period Numerator: / Denominator: Initial investment / Annual net cash flow Project Y $ 480,000 / Project Z $ 468,000 If the company bases investment decisions solely on payback period, which project will it choose? = 0 = 0 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 0 0 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 Net Cash Flows X Present Value of Annuity at 8% Present Value of Net Cash Flows Years 1-4 $ 0 Net present value Project z Net Cash Flows X Present Value of Annuity at 8% Present Value of Net Cash Flows Years 1-3 $ 0 Net present value company ses investme project will it choose? cisions solely on net present value, which
