Problem 26-3A (Algo) Applying payback period, accounting rate of return, and net present value LO P1, P2, P3 Garcia Company can invest in one of two alternative projects. Project Y requires a $425,000 initial investment for new machinery with a four-year life and no salvage value. Project Z requires a $462,000 initial investment for new machinery with a three-year life and no salvage value. The two projects yield the following annual results. Cash flows occur evenly within 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 $ 475,000 Project Z $ 440,000 Annual Amounts Sales of new product Expenses Materials, labor, and overhead (except depreciation) Depreciation-Machinery Selling, general, and administrative expenses Income 220,000 106,250 61,000 $ 87,750 200,000 154,000 50,000 $ 36,000 Required: 1. Compute each project's annual net cash flows. 2. Compute each project's payback period. If the company bases investment decisions solely on payback period, which project will it choose? 3. Compute each project's accounting rate of return. If the company bases investment decisions solely on accounting rate of return, which project will it choose? 4. Compute each project's net present value using 6% as the discount rate. If the company bases investment decisions solely on net present value, which project will it choose? Required 1 Required 2 Required 3 Required 4 Compute each project's annual net cash flows. Project Y Project 2 Annual Amounts Income Cash Flow Income Cash Flow Sales of new product $ 475,000 $ 475,000 220,000 220,000 200,000 200,000 Expenses Materials, labor, and overhead (except depreciation) Depreciation Machinery Selling, general, and administrative expenses 154,000 X 106,250 61,000 87,750 50,000 106,250 X 154,000 61,000 50,000 $ (404,000) 87,750 Income $ Net cash flow $ S (404,000) Required 1 Required 2 > Required 1 Required 2 Required 3 Required 4 Compute each project's payback period. If the company bases investment decisions solely on payback period, which project will it choose? Payback Period / Denominator: Numerator: Payback period 0 Project Y Project Z If the company bases investment decisions solely on payback period, which project will it choose? - 0 Required 1 Required 2 Required 3 Required 4 Compute each project's accounting rate of return. If the company bases investment decisions solely on accounting rate of return, which project will it choose? Accounting Rate of Return Numerator: 1 Denominator: / Accounting rate of return Project Y 0 Project Z 0 If the company bases investment decisions solely on accounting rate of return, which project will it choose? Required 1 Required 2 Required 3 Required 4 Compute each project's net present value using 6% as the discount rate. If the company bases investment decisions solely on net present value, which project will it choose? (Do not round intermediate calculations. Round your present value factor to 4 decimals and final answers to the nearest whole dollar.) Project Y Net Cash Flows X Present Value of Annuity at 6% Present Value of Net Cash Flows Years 1-4 $ 0 Net present value Project Z Net Cash Flows Present Value of Annuity at 6% Present Value of Net Cash Flows Years 1-3 = $ 0 Net present value If the company bases investment decisions solely on net present value, which project will it choose?
