Factor Company is planning to add a new product to its line. To manufacture this product, the...
Question:
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 an $11,000 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:
Expected annual sales of new product $ 1,880,000
Expected annual costs of the new product:
| Direct materials | $485,000 |
| Direct labor | $676,000 |
| Overhead (excluding straight-line depreciation on the new machine) | $335,000 |
| Selling and administrative expenses | $148,000 |
| Income taxes | 32 % |
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.) (Do not round intermediate calculations.)
Payback Period
It is the traditional Capital Budgeting method which represents the time taken to recover the initial Investment. It ignores the time value of money and the cash flows in the project after the Payback period.
Net Present Value
It is one of the most accepted method of Capital Budgeting which is equal to Present value of future Cash Inflows from the Investment minus the Initial Investment.
Answer and Explanation: 1
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View this answer1) Straight Line Depreciation for the new machine is calculated below:
New Machine Cost = $503,000
Salvage Value = $11,000
Useful Life = 4 years
S...
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