It has been determined that straight-line depreciation for FB1 is $126,000 and that FB2 is $124,000. For FB1, net income is $129,500 and net cash flow is $255,500. For FB2, net income is $58,080 and net cash flow is $182,080. Answer the following questions:

1. Compute each machines payback period, assuming that cash flows occur evenly throughout each year.

2. Compute each machines accounting rate of return, assuming that income is earned evenly throughout each year.

3. Compute the net present value for each machine using a discount rate of 6% and assuming that cash flows occur at each year-end.

4. Determine which product line the company should choose. Why?

Factor Company wants to add a new product to its line. There are two choices. To manufacture product FB1, the company will need to purchase a new machine at a $519,000 cost with an expected four-year life and a $15,000 salvage value. All sales are for cash, and all cost are out-of-pocket, except for depreciation on the new machine. Additional information includes: Expected annual sales of new product $1,960,000 Expected annual costs of new product Direct materials 460,000 Direct labor 678,000 Overhead (excluding straight-line depreciation on new machine) 338,000 Selling and administrative expenses 173,000 Income taxes 30% To manufacture product FB2, the company will need to purchase a new machine at a $511,000 cost with an expected four-year life and a $15,000 salvage value. All sales are for cash, and all cost are out-of-pocket, except for depreciation on the new machine. Additional information includes: Expected annual sales of new product $1,850,000 Expected annual costs of new product Direct materials 470,000 Direct labor 671,000 Overhead (excluding straight-line depreciation on new machine) 336,000 Selling and administrative expenses 161,000 Income taxes 34%