Question
In: Accounting
Factor Company is planning to add a new product to its line. To manufacture this product,...
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 $515,000 cost with an expected four-year life and a $11,000
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 $1,
PVA of $1, and FVA of $1) (Use appropriate factor(s) from
the tables provided.)
| Expected annual sales of new product | $ | 1,920,000 | |
| Expected annual costs of new product | |||
| Direct materials | 460,000 | ||
| Direct labor | 671,000 | ||
| Overhead (excluding straight-line depreciation on new machine) | 337,000 | ||
| Selling and administrative expenses | 171,000 | ||
| Income taxes | 32 | % | |
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. (Hint: Salvage value is a cash inflow at
the end of the asset’s life.)
Solutions
Expert Solution
Answer 1.
Initial Investment = $515,000
Salvage Value = $11,000
Useful Life = 4 years
Annual Depreciation = (Initial Investment - Salvage Value) /
Useful Life
Annual Depreciation = ($515,000 - $11,000) / 4
Annual Depreciation = $126,000
Answer 2.
Answer 3.
Payback Period = Cost of Investment / Annual Net Cash Flow
Payback Period = $515,000 / $231,400
Payback Period = 2.23 years
Answer 4.
Annual Average Investment = (Initial Investment + Salvage Value)
/ 2
Annual Average Investment = ($515,000 + $11,000) / 2
Annual Average Investment = $263,000
Accounting Rate of Return = Annual Net Income / Annual Average
Investment
Accounting Rate of Return = $105,400 / $263,000
Accounting Rate of Return = 40.08%
Answer 5.
ekkarill92 answered 1 year agoRelated Solutions
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