Question

Required information Problem 25-2A Analysis and computation of payback period, accounting rate of return, and net present value LO P1, P2, P3 [The following information applies to the questions displayed below.] Most Company has an opportunity to invest in one of two new projects. Project Y requires a $340,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $340,000 investment for new machinery with a four-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 $ 370,000 $ 296,000 Expenses Direct materials 51,800 37,000 Direct labor 74,000 44,400 Overhead including depreciation 133,200 133,200 Selling and administrative expenses 26,000 26,000 Total expenses 285,000 240,600 Pretax income 85,000 55,400 Income taxes (32%) 27,200 17,728 Net income $ 57,800 $ 37,672 Problem 25-2A Part 1

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

2. Determine each project’s payback period.
3. Compute each project’s accounting rate of return.
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