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.