Problem - Jackson Company has an opportunity to invest in one of two new projects. Project Y requires a $360,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $360,000 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.
|
Project Y
|
Project Z
|
|
Sales
|
$355,000
|
$265,000
|
|
Expenses
|
|
|
|
Direct materials
|
49,700
|
30,125
|
|
Direct labor
|
71,000
|
36,750
|
|
Overhead including depreciation
|
127,800
|
129,250
|
|
Selling and administrative expenses
|
25,000
|
20,000
|
|
Total expenses
|
273,500
|
216,125
|
|
Pretax income
|
81,500
|
48,875
|
|
Income taxes (30%)
|
24,450
|
14,663
|
|
Net income
|
$57,050
|
$34,212
|
Requirement 1: Compute each project's annual expected net cash flows.
Requirement 2: Determine each project's payback period.
Requirement 3: Compute each project's accounting rate of return.
Requirement 4: Determine each project's net present value using 6% as the discount rate. Use the Table B.3 for annuity value. Assume that cash flows occur at each year-end.