Pleasant Company has an opportunity to invest in one of two new projects. Projec
ID: 2375443 • Letter: P
Question
Pleasant Company has an opportunity to invest in one of two new projects. Project Y requires a $305,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $305,000 investment for new machinery with a four-year life and no salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year. (Use Table B.3)
rev: 07_25_2011
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Compute each project%u2019s annual expected net cash flows. (Round your intermediate calculations and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
Determine each project%u2019s payback period. (Round your intermediate calculations and final answers to 2 decimal places.)
Determine each project%u2019s net present value using 7% as the discount rate. Assume that cash flows occur at each year-end. (Round "PV Factor" to 4 decimal places. Round your intermediate calculations and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
Project Y Project Z Sales $ 375,000 $ 325,000 Expenses Direct materials 52,500 40,625 Direct labor 75,000 48,750 Overhead including depreciation 135,000 146,250 Selling and administrative expenses 27,000 29,000 Total expenses 289,500 264,625 Pretax income 85,500 60,375 Income taxes (38%) 32,490 22,943 Net income $ 53,010 $ 37,432Explanation / Answer
Hi,
Please find the answer as follows:
Part 1
Annual Cash flow for Project Y = 53010 + 305000/5 = 114010
Annual Cash flow for Project Z = 37432 + 305000/4 = 113682
Part 2
Project Y's Payback Period = 305000/114010 = 2.68 Years
Project Z' Payback Period = 305000/113682 = 2.68 Years
Part 3:
Project Y's NPV = - 305000 + 114010*4.1002 = 162464
Project Z's NPV = -305000 + 113682*3.3872 = 80064
Thanks.