WEEK FOUR

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 $511,000 cost with an expected four-year life and a $23,000 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. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Expected annual sales of new product	$	1,840,000
Expected annual costs of new product
Direct materials		480,000
Direct labor		675,000
Overhead (excluding straight-line depreciation on new machine)		337,000
Selling and administrative expenses		150,000
Income taxes		34	%

Required:
1.	Compute straight-line depreciation for each year of this new machines life.

Straight-line depreciation

$122,000

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

EXPECTED NET INCOME
Revenues
Sales			$1,840,000
Expenses
Direct labor	$675,000
Direct materials	$480,000
Overhead excluding straight-line depreciation on new machine	$337,000
Selling and administrative expenses	$150,000
Straight-line depreciation on new machine	$122,000
Total expenses		$1,764,000
Income before taxes
Income tax expense
Net income
Expected Net Cash Flow
Net income
Straight-line depreciation on new machine		$122,000
Net cash flow

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 investment	/	Annual net cash flow	=	Payback period
$511,000	/		=	0

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 after-tax net income	/	Annual average investment	=	Accounting rate of return
				0

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.)

	Chart Values are Based on:
	n =
	i =
Cash Flow	Select Chart	Amount	x	PV Factor	=	Present Value
Annual cash flow	Present Value of an Annuity of 1				=	$0
Residual value	Present Value of 1				=	0
	Present value of cash inflows
		Present value of cash outflows (AMOUNT)
		Net present value (AMOUNT)

PLEASE FILL IN THE BOXES WITH THE CORRECT ANSWERS!!!