Question

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.

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