Problem:
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 five-year life and no salvage value. Project Z requires a $315,000 investment for new machinery with a four-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. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Project Y Project Z Sales $ 395,000 $ 315,000 Expenses Direct materials 55,300 39,375 Direct labor 79,000 47,250 Overhead including depreciation 142,200 141,750 Selling and administrative expenses 28,000 28,000 Total expenses 304,500 256,375 Pretax income 90,500 58,625 Income taxes (38%) 34,390 22,278 Net income $ 56,110 $ 36,347
Required:
Question 1: Compute each projects annual expected net cash flows
Question 2: Determine each projects payback period.
Question 3: Compute each projects accounting rate of return.
Note: Please provide reasons to support your answer.