Question
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $350,000 investment for new machinery with a four-year
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $350,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $350,000 investment for new machinery with a three-year life and no salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year.
Project Y | Project Z | |||||||||
Sales | $ | 350,000 | $ | 280,000 | ||||||
Expenses | ||||||||||
Direct materials | 49,000 | 35,000 | ||||||||
Direct labor | 70,000 | 42,000 | ||||||||
Overhead including depreciation | 126,000 | 126,000 | ||||||||
Selling and administrative expenses | 25,000 | 25,000 | ||||||||
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Total expenses | 270,000 | 228,000 | ||||||||
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Pretax income | 80,000 | 52,000 | ||||||||
Income taxes (30%) | 24,000 | 15,600 | ||||||||
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Net income | $ | 56,000 | $ | 36,400 | ||||||
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Required: | |||||||||||
1. | Compute each projects annual expected net cash flows.
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