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 $487,000 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.)

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.

Please give explinations and formulas!

Expected annual sales of new product	$	1,920,000
Expected annual costs of new product
Direct materials		480,000
Direct labor		679,000
Overhead (excluding straight-line depreciation on new machine)		337,000
Selling and administrative expenses		141,000
Income taxes		32	%

Solution

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you. 1. Compute straight-line depreciation for each year of this new machine’s life. Cost of New Machine 487000 Less: Salvage Value -23000 Depreciable Value 464000 Life 4 Annual Depreciation 116000 2. Determine expected net income and net cash flow for each year of this machine’s life. Expected annual sales of new product $ 1,920,000 Less: Direct materials 480,000 Direct labor 679,000 Overhead (excluding straight-line depreciation on new machine) 337,000 Depreciation 116,000 Selling and administrative expenses 141,000 Income Before Tax 167,000 Less: Tax 32% 53440 Net Income 113,560 Cash Flow: Net Income 113560 Add: Non Cash Expense: Depreciation 116,000 Net Cash Flow 229560 3. Compute this machine’s payback period, Cost of Machine/Annual Net Cash flow 487000/229560                                                                                                2.12 Year 4. Compute this machine’s accounting rate of return, Net Income/Cost of Machine 113560/487000 23.32% 5. Compute the net present value Period PV @ 7% Amount PV of Amount Initial Investment 0 1 -487000 -487000 Annual Cash inflow 1-4 3.387211 229560 777568 Salvage Value 4 0.762895 23000 17547 NPV 308115