Question

Factor Company is planning to add a new product to its line. To manufacture this product the company needs to buy a new machine at a $180,000 cost with an expected four year life and a $20,000 salvage value. All sales are for cash, and all costs are out-ofpocket except for depreciation on the new machine. Additional information includes the following (PV of $1. FV O $1. PVA of $1 and FVA OF $1) (Use appropriate factor(s) from the tables provided.) $1,840,000 Expected annual sales of new product Expected annual costs of new product Direct materials Direct labor Overhead (excluding straight-line depreciation on new machine) Selling and administrative expenses Income taxes 488,888 672,000 336,000 160,000 30%

Answer 1

Solution 1:

Straight line depreciation = ($480000- $20000) / 4 = $115,000

Solution 2:

Expescted Net Income
Revenues:
Sales		$18,40,000
Expenses:
Direct Materials	$4,80,000
Direct Labor	$6,72,000
Overhead excluding depreciation	$3,36,000
Selling and administrative expenses	$1,60,000
Straight line depreciation	$1,15,000
Total Expenses		$17,63,000
Income before taxes		$77,000
Income tax expense (30%)		$23,100
Net Income		$53,900
Expected net Cash Flow
Net Income		$53,900
Add: Straight line Depreciation		$1,15,000
Net Cash Flow		$1,68,900

Solution 3:

Payback Period
Choose Numerator	/	Choose Denominator	=	Payback Period
Cost of investment	/	Annual net Cash flow	=	Payback Period
$4,80,000	/	$1,68,900	=	2.84

Solution 4:

Average Investment = ($480000+$20000)/2 = $250,000
Accounting rate of Return
Choose Numerator	/	Choose Denominator	=	Accounting Rate of Return
Annual Net Income after tax	/	Average Investment	=	Accounting Rate of Return
$53,900	/	$2,50,000	=	21.56%

Solution 5:

	Chart Values are based on
	n=	4
	i=	6%
Cash Flow	Select Chart	Amount	*	PV Factor	=	Present Value
Annual cash Flow	Present Value of an annuity of 1	$1,68,900	*	3.3872	=	$5,72,098
Residual Value	present value of 1	$20,000	*	0.7629	=	$15,258
	Present value of cash inflows					$5,87,356
	Present value of cash outflows					-$4,80,000
	Net Present Value					$1,07,356