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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

2. Determine each project’s payback period.

Payback Period
	Choose Numerator:	/	Choose Denominator:	=	Payback Period
		/		=	Payback period
Project Y				=
Project Z				=

Answer 1

Payback period = Project Investment / Net operating Cash flow per year
Payback period for Project Y = $3,40,000 / $1,21,417 = 2.80 Years
Payback period for Project Z = $3,40,000 / $1,10,698 = 3.07 Years
Working
Depreciation of Project Y using straight line method = (Cost - salvage value)/useful life = ($340000-$0)/6 years = $56,667
Depreciation of Project Z using straight line method = (Cost - salvage value)/useful life = ($340000-$0)/5 years = $68,000
Net Operating cash flow per year of Project Y = Net Income + Depreciation = $64,750 + $56,667 = $1,21,417
Net Operating cash flow per year of Project Z = Net Income + Depreciation = $42,698 + $68,000 = $1,10,698