Please help with problem 3 Most Company has an opportunity to invest in one of t
ID: 2800929 • Letter: P
Question
Please help with problem 3
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $350,000 Problem 24-2A investment for new machinery with a four-year life and no salvage value. Project Z requires a $350,000 Analysis and computation of investment for new machinery with a three-year life and no salvage value. The two projects yield the fo payback period, accounting rate lowing predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly of return, and net present value throughout each year Project Y Project Z Expenses 49,000 70,000 26,000 25,000 270,000 80,000 24,000 35,000 42,000 26,000 25,000 228,000 52,000 15,600 Selling and administrative e xpenses ... " . Required 1. Compute each project's annual expected net cash flows. (Round the 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 8% as the discount rate. For part 4 only, assume that Check For ProjectY: (2) 2.44 years (3) 32% 4) $125,286 cash flows occur at each year-end. Round the net present value to the nearest dollar.) Analysis Component 5. Identify the project you would recommend to management and explain your choiceExplanation / Answer
a.) Annual Depreciation of Project Y =$350,000/4 =$87,500
Annual Cash Flows from Project Y =$56,000 + 87,500 =$143,500
Annual Depreciation of Project Z =$350,000/3 =$116,667
Annual Cash Flows from Project Y =$36,400 + 116,667 =$153,067
b.) Payback Period of Project Y = 2 + (350,000 - 2x143,500)/143,500 =2 + 0.44 =2.44 years
Payback Period of Project Z = 2 + (350,000 - 2x153,067)/153,067 =2 + 0.29 =2.29 years
c.) Accounting Rate of Return for Project Y =80000/(350000/4)x100 =91.42%
Accounting Rate of Return for Project Z =52000/(350000/3)x100 =44.57%
d.) NPV of Project Y = -350,000 + 143,500x{(1-(1+0.08)-4)0.08}
= -350,000 + 143,500x3.3121
= -350,000 + 475,290
= 125,290
NPV of Project Z = -350,000 + 153,067x{(1-(1+0.08)-3)0.08}
= -350,000 + 153,067x2.5771
= -350,000 + 394,469
= 44,469
e.) Since the NPV of Project-Y is higher, it is adding more value to the business in dollar terms and with same value of investment. Moreover, the project is stated to span over a life of 4 years as comparred to 3 years for other project. Hence, Project-Y is recommended.