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		$	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

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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