Most Company has an opportunity to invest in one of two new projects. Project Y requires a $315,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $315,000 investment for new machinery with a three-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 $1) (Use appropriate factor(s) from the tables provided.)
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Project Y
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Project Z
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Sales
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$
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395,000
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$
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320,000
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Expenses
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|
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|
|
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|
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Direct materials
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55,300
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|
|
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40,000
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|
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Direct labor
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79,000
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|
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48,000
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Overhead including depreciation
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142,200
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|
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144,000
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Selling and administrative expenses
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28,000
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|
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29,000
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|
|
|
|
|
|
|
|
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Total expenses
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304,500
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261,000
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Pretax income
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90,500
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|
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59,000
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Income taxes (28%)
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25,340
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|
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16,520
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|
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Net income
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$
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65,160
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|
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$
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42,480
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1. Compute each project's annual expected net cash flows.
2. Determine each project's payback period.
3. Compute each project's accounting rate of return.
4. Determine each project's net present value using 8% as the discount rate. Assume that cash flows occur at each year-end.
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