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 $507,000 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.)

Expected annual sales of new product	$	1,910,000
Expected annual costs of new product
Direct materials		490,000
Direct labor		678,000
Overhead (excluding straight-line depreciation on new machine)		336,000
Selling and administrative expenses		146,000
Income taxes		32	%

Required: 1. Compute straight-line depreciation for each year of this new machines life. 2. Determine expected net income and net cash flow for each year of this machines life. 3. Compute this machines payback period, assuming that cash flows occur evenly throughout each year. 4. Compute this machines 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 assets life.)

Required 1 Required 2 Required 3 Required 4 Required 5 Compute straight-line depreciation for each year of this new machine's life. Straight-line depreciation $ 123,000 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. $ 1,910,000 Expected Net Income Revenues Sales Expenses Direct materials Direct labor Overhead excluding straight-line depreciation on new machine Selling and administrative expenses Straight-line depreciation on new machine $ 490,000 678,000 336,000 146,000 123,000 1,773,000 137,000 43,840 Total expenses Income before taxes Income tax expense Net income Expected Net Cash Flow Net income 123,000 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. Choose Numerator: 1 Cost of investment 507,000] / Payback Period Choose Denominator: Annual net cash flow Payback Period Payback period 0 $ 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. Choose Numerator: Annual after-tax net income Accounting Rate of Return Choose Denominator: Annual average investment Accounting Rate of Return Accounting rate of return / 0