Problem 24-1A Computing payback period, accounting rate of return, and net present value LO P1, P2, P3 Factor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $503,000 cost with an expected four-year life and a $15,000 salvage value. All sales are for cash, and all costs are out-of-pocket, except for depreciation on the new machine. Additional information includes the following. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) $1,960,000 Expected annual sales of new product Expected annual costs of new product Direct materials Direct labor Overhead (excluding straight-line depreciation on new machine) Selling and administrative expenses Income taxes 475,000 678,000 335,000 155,000 36% Required: 1. Compute straight-line depreciation for each year of this new machine's life. 2. Determine expected net income and net cash flow for each year of this machine's life. 3. Compute this machine's payback period, assuming that cash flows occur evenly throughout each year. 4. Compute this machine's accounting rate of return, assuming that income is earned evenly throughout each year. 5. Compute the net present value for this machine using a discount rate of 8% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the asset's life.) Required 1 Required 2 Required 3 Required 4 Required 5 Determine expected net income and net cash flow for each year of this machine's life. $ 1,960,000 Expected Net Income Revenues Sales Expenses Direct labor Direct materials $ Overhead excluding straight-line depreciation on new machine 678,000 475,000 335,000 155,000 122,000 Selling and administrative expenses Straight-line depreciation on new machine Total expenses 1,765,000 195,000 Income before taxes Income tax expense Net income Expected Net Cash Flow Net income Straight-line depreciation on new machine Net cash flow Required 1 Required 2 Required 3 Required 4 Required 5 Compute this machine's payback period, assuming that cash flows occur evenly throughout each year. Payback Period Choose Denominator: Choose Numerator: I = Payback Period Payback period Required 1 Required 2 Required 3 Required 4 Required 5 Compute this machine's accounting rate of return, assuming that income is earned evenly throughout each year. Accounting Rate of Return Choose Denominator: Choose Numerator: = Accounting Rate of Return Accounting rate of return 0 Required 1 Required 2 Required 3 Required 4 Required 5 Compute the net present value for this machine using a discount rate of 8% and assuming that cash flows occur at each year- end. (Hint: Salvage value is a cash inflow at the end of the asset's life.) (Do not round intermediate calculations. Amounts to be deducted should be indicated by a minus sign.) Chart Values are Based on: n= Select Chart Amount x PV Factor = Cash Flow Annual cash flow Residual value Present Value $ Net present value
