Most Company has an opportunity to invest in one of two new
projects. Project Y requires a $320,000 investment for new
machinery with a five-year life and no salvage value. Project Z
requires a $320,000 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 | $ | 390,000 | $ | 312,000 | ||||
Expenses | ||||||||
Direct materials | 54,600 | 39,000 | ||||||
Direct labor | 78,000 | 46,800 | ||||||
Overhead including depreciation | 140,400 | 140,400 | ||||||
Selling and administrative expenses | 28,000 | 28,000 | ||||||
Total expenses | 301,000 | 254,200 | ||||||
Pretax income | 89,000 | 57,800 | ||||||
Income taxes (36%) | 32,040 | 20,808 | ||||||
Net income | $ | 56,960 | $ | 36,992 | ||||
Compute each project’s annual expected net cash flows.
--first line of chart cut off on accident
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Project Y:
Initial Cost = $320,000
Useful Life = 5 years
Annual Depreciation = $320,000/5
Annual Depreciation = $64,000
Annual Net Cash Flows = Net Income + Depreciation
Annual Net Cash Flows = $56,960 + $64,000
Annual Net Cash Flows = $120,960
Project Z:
Initial Cost = $320,000
Useful Life = 4 years
Annual Depreciation = $320,000/4
Annual Depreciation = $80,000
Annual Net Cash Flows = Net Income + Depreciation
Annual Net Cash Flows = $36,992 + $80,000
Annual Net Cash Flows = $116,992
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