Question

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 six-year life and no salvage value. Project Z requires a $340,000 investment for new machinery with a five-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		$	350,000			$	280,000
Expenses
Direct materials			49,000				35,000
Direct labor			70,000				42,000
Overhead including depreciation			126,000				126,000
Selling and administrative expenses			25,000				25,000
Total expenses			270,000				228,000
Pretax income			80,000				52,000
Income taxes (30%)			24,000				15,600
Net income		$	56,000			$	36,400

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

Project Y
Chart values are based on:
n =	6
i =	7%
Select Chart	Amount	x	PV Factor	=	Present Value
Present value of an annuity of 1	112667	x	4.7665	=	537027
Present value of cash inflows					537027
Present value of cash outflows					340000
Net present value					197027
Project Z
Chart values are based on:
n =	5
i =	7%
Select Chart	Amount	x	PV Factor	=	Present Value
Present value of an annuity of 1	104400	x	4.1002	=	428061
Present value of cash inflows					428061
Present value of cash outflows					340000
Net present value					88061
Workings:
	Project Y	Project Z
Net income	56000	36400
Add: Depreciation	56667	68000
Annual cash flows	112667	104400