Question

factory Company is planning to add a new product to its line. $483,000 cost $23,000 salvage

Factor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine ta $183,000 cost with an expected four year life and a $23,000 salvage value. All sales are for cash, and all costs are out-of-pocket except for depreciation on the new machine. Additional information includes the following (PV of $1. FV of S1, PVA of 51, and FVA of $1) (Use appropriate factor(s) from the tables provided.) 61,660,000 Expected a l sales of new product Expected annual costs of new product Direct materials Direct Labor Overhead (excluding straight-11e depreciation on new machine) Selling and administrative expenses Income taxes 485,000 679,000 336.000 156,000 Required: 1. Compute straight-line depreciation for each year of this new machine's life 2. Determine expected net income and net cash flow for each year of this machine's life. 3. Compute this machine's payback period, assuming that cash flows occur evenly throughout each year. 4. Compute this machine's accounting rate of return, assuming that income is earned evenly throughout each year. 5. Compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year-end. (Mint Salvage value is a cash inflow at the end of the asset's life)

Answer 1

1. Straight line Depreciation = (Original Value - Salvage Value) / Useful life
= ($483000-23000)/4 = $115000

2.

Revenues
Expected Sales		$    18,60,000
Expenses
Direct Material	$         4,85,000
Direct Labor	$         6,79,000
Overhead	$         3,36,000
Selling and administrative expenses	$         1,54,000
Depreciation	$         1,15,000
Total Expense		$    17,69,000
Income before taxes		$          91,000
Income tax @34%		$          30,940
Net Income		$         60,060
Expected Net Cash Flow
Net Income		$          60,060
Depreciation		$      1,15,000
Expected Net Cash Flow		$      1,75,060

3. Payback Period = Investment / Annual expected cash flows
= $483000 / 175060 = 2.76 years

4. Accounting Rate of Return = Annual Net Income / Investment
= $60060 / 483000 = 12.43%

5.

	n =	4
	I =	7%
Annual Cash flow	Expected Net Cash Flow	$      1,75,060	3.3875	$      5,93,016
Residual Value	Salvage Value	$          23,000	0.763	$          17,549
	Total PV			$      6,10,565
	Less Investment			$      4,83,000
	NPV			$      1,27,565