Question

Most Company has an opportunity to invest in one of two new projects. Project Y requires a $310,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $310,000 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. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Project Y Project Z
Sales $370,000 $296,000
Expenses :
Direct materials 51,800 37,000
Direct labor 74,000 44,400
Overhead including depreciation 133,200 133,200
Selling and administrative expenses 26,000 26,000
Total expenses 285,000 240,600
Pretax income 85,000 55,400
Income taxes (34%) 28,900 18,836
Net income $56,100 $36,564

Required:
Determine each project's net present value using 7% as the discount rate. Assume that cash flows occur at each year-end. (Round your intermediate calculations.)

Answer 1

Project Y = $174,233.32

Project Z = $76,358.86

Step-by-step explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.

Cash flow = net income + depreciation

Straight line depreciation expense = (Cost of asset - Salvage value) / useful life

Project Y =

Depreciation = $310,000 / 5 = 62,000

62,000 + $56,100 = $118,100

Project Z

Depreciation = $310,000 / 4 = $77,500

$77,500 + $36,564 = $114,064

NPV can be calculated using a financial calculator

Project Y

cash flow in year 0 = $-310,000

Cash flow each year from year 1 to 5 = $118,100

I = 7%

NPV =

Project Z

cash flow in year 0 = $-310,000

Cash flow each year from year 1 to 4 = $114,064

I = 7%

NPV = $76,358.86

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

118100

114064