Problem 11-2A Analysis and computation of payback period, accounting rate of return, and net present value LO P1, P2, P3

* 5. IDENTIFY THE PROJECT YOU WOULD RECOMMEND TO MANAGEMENT AND EXPLAIN YOUR CHOICE. *

[The following information applies to the questions displayed below.] 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. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

	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
Total expenses			270,000				228,000
Pretax income			80,000				52,000
Income taxes (30%)			24,000				15,600
Net income		$	56,000			$	36,400

1. Compute each projects annual expected net cash flows.

	Project Y	Project Z
Net Income	$56,000	36,400
Depreciation expense	87,500	116,666
Expected net cash flows	143,500	153,067

2. Determine each project's payback period

	Choose numerator:	/	Choose denominator:	=	Payback period
	Cost of investment	/	Annual net cash flow	=	Payback period
Project Y	$350,000	/	143,500	=	2.44 years
Project Z	$350,000	/	153,067	=	2.29 years

4. Determine each project's net present value using 8% as the discount rate. Assume that cash flows occur at each year-end.

Project Y: n = 4, i = 8%

Select chart	amount	x	PV factor	=	present value
Present value of an annuity of 1	$143,500	x	3.3121	=	$475,286

Present value of cash inflows	$475,286
Present value of cash outflows	350,000
Net present value	$125,290

Project Z: n=3, i= 8%

Select chart	amount	x	PV factor	=	present value
Present value of an annuity of 1	$153,067	x	2.5771	=	$394,469

Present value of cash inflows	$393,469
Present value of cash outflows	350,000
Net present value	$44,468

5. IDENTIFY THE PROJECT YOU WOULD RECOMMEND TO MANAGEMENT AND EXPLAIN YOUR CHOICE.