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 \$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.)

 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