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Problem 24-2A Analysis and computation of payback period, accounting rate of return, and net present value LO P1, P2, P3 Skip to question [The following
Problem 24-2A Analysis and computation of payback period, accounting rate of return, and net present value LO P1, P2, P3
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[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 $330,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $330,000 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. (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 | $ | 370,000 | $ | 296,000 | ||||
Expenses | ||||||||
Direct materials | 51,800 | 37,000 | ||||||
Direct labor | 74,000 | 44,400 | ||||||
Overhead including depreciation | 133,200 | 133,200 | ||||||
Selling and administrative expenses | 26,000 | 26,000 | ||||||
Total expenses | 285,000 | 240,600 | ||||||
Pretax income | 85,000 | 55,400 | ||||||
Income taxes (36%) | 30,600 | 19,944 | ||||||
Net income | $ | 54,400 | $ | 35,456 | ||||
Problem 24-2A Part 1
Required: 1. Compute each projects annual expected net cash flows. 2. Determine each projects payback period. 3. Compute each projects accounting rate of return. 4. Determine each projects net present value using 7% as the discount rate. Assume that cash flows occur at each year-end. (Round your intermediate calculations.)
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