Factor Company is planning to add a new product to its line

Factor 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 $491,000 cost with an expected four-year life and a $23,000 salvage value. All sales are for cash, and all costs are out-of-pocket, except for depreciation on the new machine. Additional information includes the following. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Expected annual sales of new product Expected annual costs of new product $1,900,000 Direct materials Direct labor Overhead (excluding straight-line depreciation on new machine) Selling and administrative expenses Income taxes 475,000 676,000 336,000 168,000 34% Required: 1. Compute straight-line depreciation for each year of this new machine\'s life 2. Determine expected net income and net cash flow for each year of this machine\'s life 3. Compute this machine\'s payback period, assuming that cash flows occur evenly throughout each year. 4. Compute this machine\'s accounting rate of return, assuming that income is earned evenly throughout each year 5. Compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year-end (Hint Salvage value is a cash inflow at the end of the asset\'s life.) Answer is not complete Complete this question by entering your answers in the tabs below Required 1 Required 2 Required 3Required 4 Required5 Compute straight-line depreciation for each year of this new machine\'s life tra ine depreciation 117.000 Required 1 Required 2 >

Solution

2)

Net cash flow =Net income +depreciation(non cash)

    = 84480+117000

= 201480

3)Payback period =Initial investment /cash flow

      = 491000/201480

       = 2.44 years

4)Accounting rate of return =net income /average investment

          = 84480/257000

         = .3287 or 32.87%

**Average investment = [beginning value +ending value]/2

      =[491000+23000]/2

        = 257000

5)

sales	1900000
less:direct material	475000
Direct labor	676000
overhead	336000
selling and administrative expense	168000
Depreciation	11700
Total expense	1772000
Income before tax	128000
less:Tax [128000*.34]	(43520)
Net income	84480