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 $519,000 cost with an expected four-year life and a $15,000 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.) $1,860,000 Expected annual sales of new product Expected annual costs of new product Direct materials Direct labor Overhead (excluding straight-line depreciation on new machine) Selling and administrative expenses Income taxes 475,000 677,000 337,000 153,000 38% 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 6% 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.)

Solution

Req 1. Cost of Machine 519000 Less: Salvage value 15000 Depreciable amount 504000 Divide: Life 4 Annual Depreciation 126000 Req 2: Annual Net income: Revenue 1860000 Less: Expense Material 475000 labour 677000 Overheads 337000 Sselling and Admin Expense 153000 Depreciation 126000 Total expensne 1768000 Net income before tax 92000 Less: Tax @ 38% 34960 Net annual income 57040 Expected Net cash flow: Net incomeafter tax 57040 Add: Depreciation 126000 Net annual cash flows 183040 Payback period: Initial Investment / Annual cash inflows= Payback period 519000 / 183040 = 2.84 years Accounting rate of return: Net income /    Average investment = Accounting rate of return 57040 / 267000 21.36% Note: Average investment= (519000+15000)/2 = 267000 Net present value n= 4 years i= 6% cash flows Select chart Amount * PV factor = Present value Annual cashinflows Annuity chart 183040 3.4651 634251.9 Residual Value Present value 15000 0.7921 11881.5 Total Present value of Inflows 646133 Less: Initial investment 519000 Net present value 127133