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

3. Compute each project’s accounting rate of return.

 Accounting Rate of Return Choose Numerator: / Choose Denominator: = Accounting Rate of Return / = Accounting rate of return Project Y 0 Project Z 0

 Ans. 3 Accounting rate of return is the percentage ratio of net income on average investment. *First of all, average investment is to be caluclated. *Average investment =   (Cost of maching + Salvage value) / 2 Project Y (\$340,000 + 0) / 2 \$170,000 Project Z (\$340,000 + 0) / 2 \$170,000 *Now we can calulate the accounting rate of return of both projects. Accounting rate of return =   Net income / Average investment * 100 Project Y \$63,270 / \$170,000 * 100 37.22% Project Z \$41,070 / \$170,000 * 100 24.16%

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