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 four-year life and no salvage value. Project Z requires a $325,000 investment for new machinery with a three-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		$	355,000			$	284,000
Expenses
Direct materials			49,700				35,500
Direct labor			71,000				42,600
Overhead including depreciation			127,800				127,800
Selling and administrative expenses			25,000				25,000
Total expenses			273,500				230,900
Pretax income			81,500				53,100
Income taxes (36%)			29,340				19,116
Net income		$	52,160			$	33,984

1. Compute each project’s annual expected net cash flows.

	Project Y Project Z

2. Determine each project’s payback period.

	Payback Period Choose Numerator: / Choose Denominator: = Payback Period / = Payback period Project Y = Project Z =

3. Compute each project’s accounting rate of return.

	Accounting Rate of Return Choose Numerator: / Choose Denominator: = Accounting Rate of Return / = Accounting rate of return Project Y = Project Z =

4. Determine each project’s net present value using 8% as the discount rate. Assume that cash flows occur at each year-end. (Round your intermediate calculations.)

	Project Y Chart values are based on: n = i = Select Chart Amount x PV Factor = Present Value = $0 Net present value Project Z Chart values are based on: n = i = Select Chart Amount x PV Factor = Present Value = $0 Net present value

Answer 1

Ans. 1		Project Y	Project Z
	Net income	$52,160	$33,984
	Add: Depreciation	$81,250	$108,333
	Net cash inflow	$133,410	$142,317
	*Depreciation = (Cost of project - Salvage value) / Useful life in years
	Project Y	($325,000 - $0) / 4	$81,250
	Project Z	($325,000 - $0) / 3	$108,333
Ans. 2	Payback period = Initial investment / Annual cash inflows
	Project Y	$325,000 / $133,410	2.44	years
	Project Z	$325,000 / $142,317	2.28	years
Ans. 3	Accounting rate of return =   Net income / Average investment * 100
	Project Y	$52,160 / $162,500 * 100	32.10%
	Project Z	$33,984 / $162,500 * 100	20.91%
	*Average investment =   (Cost of maching + Salvage value) / 2
	Project Y	($325,000 + 0) / 2	$162,500
	Project Z	($325,000 + 0) / 2	$162,500
Ans. 4	PROJECT Y:
	Initial Investment	$325,000
	Chart values are based on :
	i	8%
	Year	Cash inflow    *	PV factor	Present Value
	1	$133,410	0.926	$123,538
	2	$133,410	0.857	$114,332
	3	$133,410	0.794	$105,928
	4	$133,410	0.735	$98,056
	Total Present Value Of Cash Inflow			$441,854
	Present value of cash inflows			$441,854
	Less: Investment			-$325,000
	Net present value			$116,854
	PROJECT Z:
	Initial Investment	$325,000
	Chart values are based on :
	i	8%
	Year	Cash inflow    *	PV factor	Present Value
	1	$142,317	0.926	$131,786
	2	$142,317	0.857	$121,966
	3	$142,317	0.794	$113,000
	Total Present Value Of Cash Inflow			$366,751
	Present value of cash inflows			$366,751
	Less: Investment			-$325,000
	Net present value			$41,751
	*Calculation of Present value factors:   (PV @ 8%)
	Year		PV @ 8%
	1	1 / (1 + 0.08)^1	0.926
	2	1 / (1 + 0.08)^2	0.857
	3	1 / (1 + 0.08)^3	0.794
	4	1 / (1 + 0.08)^4	0.735
	Total of Pv of an annuity		3.312