Question

Problem 24-2A Analysis and computation of payback period accounting rate of return and net present value P1 P2 P3 Most Company has an opportunity to invest in one of two new projects Project Y requires a $350,000 invest- ment for new machinery with a four-year life and no salvage value. Project Z requires a $350,000 investment for new machinery with a three-year life and no salvage value. The two projects yield the following predicted an- nual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year. Project Y Project Z $350,000 $280,000 Sales Expenses Direct materials Direct labor Overhead including depreciation Selling and administrative expenses Total expenses.... Pretax income... Income taxes (309 Net income 49,000 70,000 126.000 25,000 270.000 80,000 24.000 $ 56,000 35,000 42.000 126.000 25,000 228.000 52.000 15,600 $ 36,400 Check For Project (2) 2 44 years (3) 32% (4) $125.286 Required 1. Compute cach project's annual expected net cash flows. (Round the net cash flows to the nearest dollar) 2. Determine each project's payback period. (Round the payback period to two decimals.) 3. Compute cach project's accounting rate of return. (Round the percentage return to one decimal.) 4. Determine each project's not present value using 8% as the discount rate. For part 4 only, assume that cash flows occur at each year-end. (Round the net present value to the nearest dollar.) Analysis Component 5. Identify the project you would recommend to management and explain your choice.

Answer 1

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Aasi Amount in In the Book of most company (1) Annual enperted ner cash flow : project -Y ncome : $56000 Add: Depreciation : $87500 (350,000/4) < (350,000/3) projesi - $ 36,400 $416667 Expectech Annual net cash frow : $143900 $153067 _12) payback period; Pojev-z $ 357000 Рxojeeg-y Innitial investment : $ 350,000 Leys: Cash frow of yeano t ; $ 1,43500 $ 206 500 $ 153,067 iss: cash flow of year-2 : $1,43500 $ 63,000 : $143500 $80-500- $1.96,933 $153067 $ 43866 $ 153067 $109201 less: cash flow of year -3

for both the projet. Hence, pay back_period is 3 year 3) Accounting rate of returen :- povjet- y ca Yorar cash flow :$574000 (143500 K 4) + (15306 7 * 3) (6) innitial Investment • $ 350000 project - Z $ 459201 $ 350000 1646% 131.27 Accounting rate of return : 11a/b) 1007 14 Nez present value: Disc factor projecF-Yu proyect- year @ 84 cash flow Amount cash flow Amount I (3.75000) (375000) (375000) (3.45000) •9259 143500 132,867 153067 144725 8573 143500 123023 953067 131224 3 · 7938 143500 13910 953067 121505 4 7350 243500 105473 - $ 100 273 $19.454

15) I would recommenon protect-y to the management. higher accounting rate of return) as profeut y have anon higher NPV .

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