Question

Problem 24-2A Analysis and computation of payback period, accounting rate of return, and net present value LO P1, P2, P3 [The following information applies to the questions displayed below.] Most Company has an opportunity to invest in one of two new projects. Project Y requires a $335,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $335,000 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 $ 400,000 Project Z $ 320,000 Sales Expenses Direct materials Direct labor Overhead including depreciation Selling and administrative expenses 56,000 80,000 144,000 29,000 40,000 48,000 144,000 29,000 Total expenses 309,000 261,000 Pretax income Income taxes (38%) 91,000 34,580 59,000 22,420 Net income $ 56,420 $ 36,580

Answer 1

annual expected 1) Computation of projects het cash flows project y $56420 project Z $ 36580 Net Income A Depreciation (Non cash or Annual expected het cash flows $ 67000 $ 83750 $123420 $ 120330 Depreciation = $335000 5 years = $ 67000 $ 335000 6 4 years $ 83752 2 computation of payback period payback period = Initial anvestment Annual het cach anflows

payback period Nenerator Denominator - payback period project 4 / $335000/ $123420= 2.71 years | project 2 & 335000 / $ 120330 = 2.78 years. 3 Computation of accounting rate of return ARR Net Income x100 Ibilical Qnvestment Accounting Rate of Return I Numerator Denominator Accounting Rate of return Project y $56420 1 $335000 = 16.844. project 2 $36580 $335000 = 10.921