Question

# Most Company has an opportunity to invest in one of two new projects. Project Y requires...

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

Determine each project’s payback period.

Annual Net Cash Flow = Net Income + Depreciation

Project Y:
Straight Line Depreciation per year = (Cost – Salvage Value) / Useful Life
Straight Line Depreciation per year = (\$320,000 – 0) / 5
Straight Line Depreciation per year = \$64,000

Annual Net Cash Flow = \$56,960 + \$64,000
Annual Net Cash Flow = \$120,960

Project Z:
Straight Line Depreciation per year = (Cost – Salvage Value) / Useful Life
Straight Line Depreciation per year = (\$320,000 – 0) / 4
Straight Line Depreciation per year = \$80,000

Annual Net Cash Flow = \$36,992 + \$80,000
Annual Net Cash Flow = \$116,992

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