Problem 25-2A Analysis and computation of payback period, accounting rate of return, and net present value LO P1, P2, P3 [The following information applies to the questions displayed below.]  Most Company has an opportunity to invest in one of two new projects. Project Y requires a $320,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $320,000 investment for new machinery with a four-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 YProject ZSales $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 (28%)  24,500   16,156 Net income $63,000  $41,544

Question
Asked May 12, 2019

Problem 25-2A Analysis and computation of payback period, accounting rate of return, and net present value LO P1, P2, P3

 

[The following information applies to the questions displayed below.]
  
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $320,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $320,000 investment for new machinery with a four-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 (28%)     24,500       16,156  
Net income   $ 63,000     $ 41,544  
 

 

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Expert Answer

Step 1

1. Compute the payback period:

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Step 2

Compute the depreciation expense (straight line method) and net annual cash flows:

 

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Step 3

2. Compute the Accounting Rate of Retu...

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