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 \$ 375,000 \$ 300,000 Expenses Direct materials 52,500 37,500 Direct labor 75,000 45,000 Overhead including depreciation 135,000 135,000 Selling and administrative expenses 27,000 27,000 Total expenses 289,500 244,500 Pretax income 85,500 55,500 Income taxes (26%) 22,230 14,430 Net income \$ 63,270 \$ 41,070

Required:
1. Compute each project’s annual expected net cash flows.

 xxxxxxxx Project Y Project Z

#### Homework Answers

Answer #1

Solution:

 Project Y Project Z Annual Expected Net Cash Flows \$119,937 \$109,070

Refer working below

 Project Y Project Z Net Income \$63,270 \$41,070 Plus: Annual Depreciation Expense (Refer Note 1) \$56,667 \$68,000 Annual Expected Net Cash Flows \$119,937 \$109,070 Note 1 - Annual Straight line depreciation expense Project Y Project Z Investment for new machinery \$340,000 \$340,000 Less: Salvage Value \$0 \$0 Depreciable Asset Value \$340,000 \$340,000 Divided by: Estimated Useful life 6 5 Annual Depreciation Expense \$56,667 (\$340,000 / 6) \$68,000 (\$340,000 / 5)

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