Micelli Company has an opportunity to invest in one of two projects. Project A r
ID: 2525241 • Letter: M
Question
Micelli Company has an opportunity to invest in one of two projects. Project A requires a $480,000 investment for new machinery with a three-year life and no salvage value. Project B also requires a $480,000 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 Project B $750,000 $800,000 125,000 250,00 Project A Sales Expenses .. Direct Direct labor . . .. 130,000 330,000 120,000 705,000 45,000 13,500 $ 31.500 80,000 276,000 120,000 726,000 74,000 Selling and administrative expenses Total expenses.. Income taxes (30%) 22,200 $ 51.800 Required 1. Compute each project's annual expected net cash flows. (Round net cash flows to the nearest dollar.) 2. Determine each project's payback period. (Round the payback period to two decimals.) 3. Compute each project's accounting rate of return. (Round the percentage return to one decimal.) 4. Determine each project's net present value using 10% as the discount rate. For part 4 only, assume that cash flows occur at each year-end. (Round net present values to the nearest dollar.)Explanation / Answer
Net Cash Flow Particulars Project A Project B 3 Year 4 year Investment-Cash Outflow 480000 480000 Depreciation 160000 120000 Net Income before Tax 45000 74000 Total Cash Income 205000 194000 Tax @ 30% 61500 58200 Total Cash Inflow after Cash 143500 135800 Saving on Depreciation 48000 36000 Annual Net Cash Inflow 191500 171800 Project Payback Period Particulars Project A Project B 3 Year 4 year Investment-Cash Outflow 480000 480000 Payback Period 2.506527 2.793946 (Investment/Annual Cash Inflow) Accounting Rate of Return (Average during the period/Average Investment) 39.89583 35.79167 Net Present Value PV of 10% 2.4868 3.169 Cash Inflows 191500 171800 PV of Cash Inflows 476222.2 544434.2 Investment 480000 480000 NPV -3777.8 64434.2 Cost Retail Beginning Inventory 302580 405457.2 Cost of Goods Purchased 941040 1260994 Cost of Goods Available for sale 1243620 1666451 Sales Less Sales Return 1202750 Ending Inventory 463700.8 Cost of Ending Inventory(463700*100/134) 346045.4