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.)
|
Project Y
|
Project Z
|
Sales
|
|
$
|
395,000
|
|
|
|
$
|
320,000
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
Direct materials
|
|
|
55,300
|
|
|
|
|
40,000
|
|
|
Direct labor
|
|
|
79,000
|
|
|
|
|
48,000
|
|
|
Overhead including depreciation
|
|
|
142,200
|
|
|
|
|
144,000
|
|
|
Selling and administrative expenses
|
|
|
28,000
|
|
|
|
|
29,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
304,500
|
|
|
|
|
261,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
|
90,500
|
|
|
|
|
59,000
|
|
|
Income taxes (28%)
|
|
|
25,340
|
|
|
|
|
16,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
65,160
|
|
|
|
$
|
42,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|