Problem 24-2A Analysis and computation of payback period, accounting rate of return, and net present value LO P1, P2, P3

Most Company has an opportunity to invest in one of two new projects. Project Y requires a $305,000 investment for new machinery with a three-year life and no salvage value. Project Z requires a $305,000 investment for new machinery with a two-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		$	355,000				$	345,000
Expenses
Direct materials			49,700					43,125
Direct labor			71,000					51,750
Overhead including depreciation			127,800					155,250
Selling and administrative expenses			25,000					31,000
Total expenses			273,500					281,125
Pretax income			81,500					63,875
Income taxes (36%)			29,340					22,995
Net income		$	52,160				$	40,880

1. Compute each projects annual expected net cash flows.

Project Y Project Z

2. Determine each projects payback period

Payback Period

Project Y

Project Z

3. Compute each projects accounting rate of return. Project Y Project Z 4. Determine each projects net present value using 8% as the discount rate. Assume that cash flows occur at each year-end.