Question

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- unting rate of return, nual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year et present value P2 P3 Project Y Project 2 Sales Expenses Direct materia's Direct labor Overhead including depreciation . , … Selling and administrative expenses Total expenses Pretax income Income taxes (30%) Net income 80,000 24,000 Required 1. Compute each project's annual expected net cash flows. (Round the net cash flows to the nearest 2. Determine each project's payback period. (Round the payback period to two decimals.) 3. Compute each project's accounting rate of return. (Round the percentage return to one decimal) 4. De k For Project Y 14 years, (3) 32% (4) $125,286 termine each project's net present value using 8% as the discount rate. For part 4 only, assume cash flows occur at each year-end. (Round the net present value to the nearest dollar.) Analysis Component

Answer 1

1. Ans

Each projects annual expected net cash flows.

Particulars	Project Y	Project Z
Net Income	80000	24000
Add: Depreciation expense	87500	116667
Expected annual net cash flows	167500	140667

2.Ans

Each Projects Payback Period

	a	b	a/b
	Cost of Investment	Annual Net cash flows	Payback period
Project Y	350000	167500	2.09	years
Project Z	350000	140667	2.49	years

3.Ans.

Each Projects Accounting Rate of Return

	a	b	a/b
	Annual after tax net income	Annual average Investment	Accounting Rate of Return
Project Y	80000	175000	45.71	%
Project Z	24000	175000	13.71	%

Annual Average investment=(cost + salvage)/2

4.Ans

Each projects Net present value using 8% as the discount rate.

Project Y

n=4; i=8% a b a x b Amount PV Factor Present value 167500 3.3121 554777 c Present value of cash inflows 554777 d Present value of cash outflows 350000 Net present value(c-d) 204777

Project Z

n=3; i=8%

	a	b	a x b
	Amount	PV Factor	Present value
	140667	3.3121	465903
c	Present value of cash inflows		465903
d	Present value of cash outflows		350000
	Net present value(c-d)		115903