Question

Most Company has an opportunity to invest in one of two new projects. Project Y requires a $325,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $325,000 investment for new machinery with a five-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. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

	Project Y				Project Z
Sales		$	375,000			$	300,000
Expenses
Direct materials			52,500				37,500
Direct labor			75,000				45,000
Overhead including depreciation			135,000				135,000
Selling and administrative expenses			27,000				27,000
Total expenses			289,500				244,500
Pretax income			85,500				55,500
Income taxes (40%)			34,200				22,200
Net income		$	51,300			$	33,300

4. Determine each project’s net present value using 7% as the discount rate. Assume that cash flows occur at each year-end. (Round your intermediate calculations.)

Answer 1

Solution 4:

Annual cash inflows for Project Y = Net income + Depreciation = $51,300 + ($325,000 / 6) = $105,467

Annual cash inflows for Project Z = Net income + Depreciation = $33,300 + ($325,000 / 5) = $98,300

Computation of NPV - Project Y
Particulars	Period	Amount	PV factor at 7%	Present Value
Cash outflows:
Initial investment	0	$325,000.00	1	$325,000
Present Value of Cash outflows (A)				$325,000
Cash Inflows
Annual cash inflows	1-6	$105,467.00	4.76654	$502,713
Present Value of Cash Inflows (B)				$502,713
Net Present Value (NPV) (B-A)				$177,713

Computation of NPV - Project Z
Particulars	Period	Amount	PV factor at 7%	Present Value
Cash outflows:
Initial investment	0	$325,000.00	1	$325,000
Present Value of Cash outflows (A)				$325,000
Cash Inflows
Annual cash inflows	1-5	$98,300.00	4.10020	$403,050
Present Value of Cash Inflows (B)				$403,050
Net Present Value (NPV) (B-A)				$78,050