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Pleasant Company has an opportunity to invest in one of two new projects. Project Y requires a $700,000 investment for new machinery with a four- year life and no salvage value. Project Z requires a $700,000 investment for new machinery with a three- year life and no salvage value. The two projects yield the fol-lowing predicted annual results. The company uses straight- line depreciation, and cash flows occur evenly throughout each year

Project Y......Project Z
Sales. . $700,000..... $560,000
Expenses Direct materials . 98,000.70,000
Direct labor. 140,000..... 84,000
Overhead including depreciation. 252,000.252,000
Selling and administrative expenses. 50,000. 50,000
Total expenses. 540,000..456,000
Pretax income 160,000.104,000
Income taxes ( 30%). 48,000.31,200
Net income . $ 112,000.$ 72,800

Required

1. Compute each project's annual expected net cash flows.

3. Compute each project's accounting rate of return.

4. Determine each project's net present value using 8% as the discount rate. For part 4 only, assume that cash flows occur at each year- end.

Analysis Component

5. Identify the project you would recommend to management and explain your choice.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9955246

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