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[answered] A company would like to invest in one of two new projects.


I have attached a file with a set of questions. The problem contains several of the answers I have already completed, complete instructions are in the Word document. It concerns net cash flows, payback, net present value.


A company would like to invest in one of two new projects.

 

Project A would be a $330,000 investment for new machinery with a four year life span and zero salvage value. Project B would be a $330,000

 

investment for new machinery with a three year life span and zero salvage

 

value. The two projects yield the following predicted annual results. Use

 

straight-line depreciation, and cash flows occur evenly throughout every

 

year. B A

 

Sales $ 400,000 $ 320,0

 

00 Expenses

 

Direct materials 56,000 Direct labor 80,000 Overhead including depreciation 144,000 Selling and administrative expenses 29,000 Total expenses 309,000 Pretax income 91,000 Income taxes (32%) 29,120 Net income $ 61,880 40,00

 

0

 

48,00

 

0

 

144,0

 

00

 

29,00

 

0

 

261,0

 

00

 

59,00

 

0

 

18,88

 

0 $ 40,12

 

0 B A

 

Sales $ 400,000 $ 320,0

 

00 Expenses

 

Direct materials 56,000 Direct labor 80,000 Overhead including depreciation 144,000 Selling and administrative expenses 29,000 Total expenses 309,000 Pretax income 91,000 Income taxes (32%) 29,120 40,00

 

0

 

48,00

 

0

 

144,0

 

00

 

29,00

 

0

 

261,0

 

00

 

59,00

 

0

 

18,88

 

0 Net income $ 61,880 $ 40,12

 

0 1. Compute the annual expected net cash flows for both projects. Net income for A=

 

$61,880 and net income for B =$40.120. Compute depreciation expense. 2. Determine payback period project A is cost of investment/annual net cash

 

flow=payback period Once #1 is completed I will be able to compute this equation

 

Cost of investment = $330,000 for both A and B 3. Determine: Project Y , n+4, I=7% so PV factor =3.3872, Project Z, n=3, I=7% so

 

PV factor = 2.6243, determine inflows, outflows and NPV using 7% as discount rate.

 


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