Question
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $320,000 investment for new machinery with a six-year
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $320,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $320,000 investment for new machinery with a five-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. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) |
Project Y | Project Z | |||||||||
Sales | $ | 375,000 | $ | 300,000 | ||||||
Expenses | ||||||||||
Direct materials | 52,500 | 37,500 | ||||||||
Direct labor | 75,000 | 45,000 | ||||||||
Overhead including depreciation | 135,000 | 135,000 | ||||||||
Selling and administrative expenses | 27,000 | 27,000 | ||||||||
Total expenses | 289,500 | 244,500 | ||||||||
Pretax income | 85,500 | 55,500 | ||||||||
Income taxes (30%) | 25,650 | 16,650 | ||||||||
Net income | $ | 59,850 | $ | 38,850 | ||||||
1. | Compute each projects annual expected net cash flows. |
Determine each projects payback period. | |
Compute each projects accounting rate of return. | |
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