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Problem 24-1A Computing payback period, accounting rate of return, and net present value LO P1, P2, P3 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 $503,000 cost with an expected four-year life and a $19,000 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 Direct materials Direct labor Overhead (excluding straight-line depreciation on new machine) Selling and administrative expenses Income taxes 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 8% 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.) Complete this question by entering your answers in the tabs below. Required 1 Required 2 X Answer is not complete. Required 3 Straight-line depreciation Required 4 Required 5 Compute straight-line depreciation for each year of this new machine's life. $ 121,000 $1,950,000 485,000 680,000 336,000 175,000 38% Required 1 Required 2 Required 3 Required 4 Required 5 Determine expected net income and net cash flow for each year of this machine's life. Expected Net Income Revenues Sales Expenses Direct labor Direct materials Overhead excluding straight-line depreciation on new machine Selling and administrative expenses Total expenses Income before taxes Income tax expense Net income Expected Net Cash Flow Net income Straight-line depreciation on new machine Net cash flow S (33 $ 1,950,000 680,000 485,000 336,000 175,000 1,676,000 274,000 X 104, 120 x $ 169,880 X $ 169,880 121,000 $ 290,880 x Required 1 Required 2 Required 3 Compute this machine's payback period, assuming that cash flows occur evenly throughout each year. Payback Period Choose Numerator: Cost of investment $ 503,000 Required 4 Required 5 1 Choose Denominator: Annual net cash flow $ 290,880 = = = Payback Period Payback period 1.73 years Required 1 Required 2 Required 3 Compute this machine's accounting rate of return, assuming that income is earned evenly throughout each year. Accounting Rate of Return Choose Denominator: Choose Numerator: Annual after-tax net income $ Required 4 Required 5 J 278,380 x 1 Annual average investment $ 125,750 X = = Accounting Rate of Return Accounting rate of return 221.38 % Required 1 Required 2 Required 3 Required 4 Required 5 Compute the net present value for this machine using a discount rate of 8% 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.) (Do not round intermediate calculations. Amounts to be deducted should be indicated by a minus sign.) Chart Values are Based on: Cash Flow Annual cash flow Residual value Select Chart Present Value of an Annuity of 1 Present Value of 1 Present value of cash inflows n = j= Present value of cash outflows Net present value $ $ Amount 4 8 % X 290,880 X X 19,000 x PV Factor 3.3321 X = 30 ** 0.7084 x = $ $ $ Present Value 969,241 13.460 982,701 503,000 X 479,701 X