Answer:
Most Company
Project Y Project Z
1. Annual expected net cash flows $140,500 $151,347
2. Payback period 2.5 years 2.3 years
3. Accounting rate of return 15.3% 9.9%
4. Net present value, using 9% $105,220 $33,059
Explanation:
a) Data and Calculations:
Project Y Project Z
Initial investment costs $350,000 $350,000
Useful life of project 4 years 3 years
Salvage value $0 $0
Annual depreciation $87,500 $116,667
Sales $390,000 $312,000
Expenses
Direct materials 54,600 39,000
Direct labor 78,000 46,800
Overhead including depreciation 140,400 140,400
Selling and administrative expenses 28,000 28,000
Total expenses 301,000 254,200
Pretax income 89,000 57,800
Income taxes (40%) 35,600 23,120
Net income $53,400 $34,680
Accounting rate of return 15.3% 9.9%
= Net income/Initial investment cost * 100
Annual Cash inflows:
Net income $53,400 $34,680
Annual depreciation 87,500 116,667
Annual expected net cash flows $140,500 $151,347
PV annuity factor at 9% for 4 years 3.240 2.531
PV of annual cash inflows $455,220 $383,059
Net Present Value = (Initial investment - PV of annual cash flows)
NPV = $105,220 $33,059
Payback period = Initial investment cost/Annual cash inflow
