TBQ Enterprises will add a new product (Product M) to its production. To manufacture Product M, the company will have to purchase a new machine costing $720,000. The machine has an expected life of four years and salvage value of $44,000. 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. Round PV factor value to 4 decimal places.)

Expected annual sales of new product	$	2,440,000
Expected annual costs of new product
Direct materials		504,000
Direct labor		696,000
Overhead (excluding straight-line depreciation on new machine)		576,000
Selling and administrative expenses		184,000
Income taxes		30	%

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 7% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the assets life.)

1.

Straight-line depreciation

$.

2.

Determine expected net income and net cash flow for each year of this machines life.

Expected Net Income
Revenues
Salesselected answer correct		$2,440,000selected answer correct
Expenses
Direct materialsselected answer correct	$504,000selected answer correct
Direct laborselected answer correct	696,000selected answer correct
Overhead excluding straight-line depreciation on new machineselected answer correct	576,000selected answer correct
Selling and administrative expensesselected answer correct	184,000selected answer correct
Straight-line depreciation on new machineselected answer correct
not attempted
not attempted
Total expenses		2,130,000
Income before taxesselected answer correct
Income tax expenseselected answer correct
Net incomeselected answer correct
Expected Net Cash Flow
Net income		$217,000
Straight-line depreciation on new machineselected answer correct
Net cash flowselected answer correct

3.

Compute this machines payback period, assuming that cash flows occur evenly throughout each year.

Payback Period
Choose Numerator:	/	Choose Denominator:	=	Payback Period
Cost of investmentselected answer correct	/	Annual net cash flowselected answer correct	=	Payback period
$720,000selected answer correct	/		=		years

4.

Compute this machines accounting rate of return, assuming that income is earned evenly throughout each year.

Accounting Rate of Return
Choose Numerator:	/	Choose Denominator:	=	Accounting Rate of Return
	/	Annual average investmentselected answer correct	=	Accounting rate of return
	/	$	=	43.06	%

5.

Compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the assets life.) (Do not round intermediate calculations. Amounts to be deducted should be indicated by a minus sign.)

	Chart Values are Based on:
	n =	not attempted
	i =n	not attempted
Cash Flow	Select Chart	Amount	x	PV Factor	=	Present Value
Annual cash flow	t				=	$0.00
Residual value					=	0.00
						$0.00
	Net present value