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.)

Homework Answers

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
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