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

Determine each project’s payback period.

Homework Answers

Answer #1

Answer:

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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