Most Company has an opportunity to invest in one of two new projects. Project Y requires a $350,000 investment for new machinery with a four-year life and no salvage value.
Project Z requires a $350,000 investment for new machinery with a three-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.
Project Y Project Z
Sales $350,000 $280,000
Expenses:
Direct materials 49,000 35,000
Direct labor 70,000 42,000
Overhead including depreciation 126,000 126,000
Selling and administrative expenses 25,000 25,000
Total expenses $270,000 $228,000
Pretax income 80,000 52,000
Income taxes (30%) 24,000 15,600
Net income $56,000 $36,400
Required:
1. Compute each project's annual expected net cash flows.
2. Determine each project's payback period.
3. Compute each project's accounting rate of return.
4. Determine each project's net present value, using 8% as the discount rate.
Assume that cash flows occur at each year-end.