Q1PSB
ExpertverifiedCortino Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $300,000 cost with an expected fouryear life and a $20,000 salvage value. All sales are for cash and all costs are outofpocket, except for depreciation on the new machine. Additional information includes the following.
Expected annual sales of new product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,150,000
Expected annual costs of new product
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420,000
Overhead (excluding straightline depreciation on new machine) . . . . . . . . . . . . . . 210,000
Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30%
Required
1. Compute straightline depreciation for each year of this new machine’s life. (Round depreciation amounts to the nearest dollar.)
2. Determine expected net income and net cash flow for each year of this machine’s life. (Round answers to the nearest dollar.)
3. Compute this machine’s payback period, assuming that cash flows occur evenly throughout each year. (Round the payback period to two decimals.)
4. Compute this machine’s accounting rate of return, assuming that income is earned evenly throughout each year. (Round the percentage return to two decimals.)
5. Compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each yearend. (Hint: Salvage value is a cash inflow at the end of the asset’s life.)
Depreciation is $70,000, net income is $35,000 and the net cash flow is $105,000. The payback period is 2.86 years, the accounting rate of return is 21.875% and the net present value is $70,914.
EXPECTED NET INCOME  
 Amount ($)  Amount ($) 
Revenues: 


Sales 
 $1,150,000 
Expenses 


Direct Materials  $300,000 

Direct Labor  420,000 

Overhead Excluding straight line Depreciation on a new machine  210,000 

Selling and administration expenses  100,000 

Straightline depreciation on a new machine  70,000 

Total Expenses 
 1,100,000 
Income before taxes 
 50,000 
Income tax expense 
 15,000 
Net Income 
 $35,000 



EXPECTED NET CASH FLOW  



Net Income 
 $35,000 
Straightline depreciation on a new machine 
 70,000 
Net cash flow 
 $105,000 
Cash flow  Select chart  Amount x  PV Factor =  Present Value 





Annual Cash flow  Present Value of Annuity of 1  $105,000  3.3872  $355,656 
Residual Value  Present Value of 1  $20,000  0.7629  15,258 
 Present value of cash inflows  $370,914 
 Present value of cash outflows  300,000 
 Net present value  $70,914 
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