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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 | $ | 385,000 | $ | 308,000 | ||||
Expenses | ||||||||
Direct materials | 53,900 | 38,500 | ||||||
Direct labor | 77,000 | 46,200 | ||||||
Overhead including depreciation | 138,600 | 138,600 | ||||||
Selling and administrative expenses | 28,000 | 27,000 | ||||||
Total expenses | 297,500 | 250,300 | ||||||
Pretax income | 87,500 | 57,700 | ||||||
Income taxes (26%) | 22,750 | 15,002 | ||||||
Net income | $ | 64,750 | $ | 42,698 |
4. 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.)
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