Q2PSB
ExpertverifiedAikman Company has an opportunity to invest in one of two projects. Project A requires a $240,000 investment for new machinery with a fouryear life and no salvage value. Project B also requires a $240,000 investment for new machinery with a threeyear life and no salvage value. The two projects yield the following predicted annual results. The company uses straightline depreciation, and cash flows occur evenly throughout each year. Company
Project A Project B
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,000 $200,000
Expenses Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 25,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 30,000
Overhead including depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 90,000
Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 18,000
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,000 163,000
Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000 37,000
Income taxes (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,100 11,100
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,900 $ 25,900
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 8% as the discount rate. For part 4 only, assume that cash flows occur at each yearend. (Round net present values to the nearest dollar.)
Analysis Component
5. Identify the project you would recommend to management and explain your choice.
Project Y has a net cash flow of $143,500, the payback period is 2.44 years, the accounting rate of return is 32% and NPV is $125,286. Project Z has a net cash flow of $153,067, the payback period is 2.29 years, the accounting rate of return is 20.8% and NPV is $44,469. Project Y should be recommended.
 Project A  Project B 
Net Income  $39,900  $25,900 
Depreciation expense  60,000  80,000 



Expected net cash flows  $99,900  $105,900 
Project Y
Chart values are based on:  
N = 4 I = 8%  




Select chart  Amount x  PV Factor =  Present Value 
Present value of an annuity of 1  $99,900  3.3121  $330,879 




Present Value of cash inflows  $330,879  
Present value of cash outflows  240,000  
Net Present value  $90,879 
Project Z
Chart values are based on:  
N = 3 I = 8%  




Select chart  Amount x  PV Factor =  Present Value 
Present value of an annuity of 1  $105,900  2.5771  $272,915 




Present Value of cash inflows  $272,915  
Present value of cash outflows  240,000  
Net Present value  $32,915 
Project A must be recommended over project B as it has a higher accounting rate of return and a higher net present value.
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