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 $480,000 cost with an expected four-year life and a $20,000 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,840,000 Expected annual costs of new product Direct materials . 480,000 Direct labor 672,000 Overhead (excluding straight-line depreciation on new machine) . 336,000 Selling and administrative expenses 160,000 Income taxes . 30% Required 1. Compute straight-line depreciation for each year of this new machine’s life. (Round depreciation amounts to the nearest dollar.) 2. Determine expected net income and net cash flow for each year of this machine’s life. (Round answers to the nearest dollar.) 3. Compute this machine’s payback period, assuming that cash flows occur evenly throughout each year. (Round the payback period to two decimals.) 4. Compute this machine’s accounting rate of return, assuming that income is earned evenly throughout each year. (Round the percentage return to two decimals.) 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. Round the net present value to the nearest dollar.
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 $480,000 cost with an expected four-year life and a $20,000 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,840,000
Expected annual costs of new product
Direct materials . 480,000
Direct labor 672,000
Selling and administrative expenses 160,000
Income taxes . 30% Required
1. Compute straight-line depreciation for each year of this new machine’s life. (Round depreciation
amounts to the nearest dollar.)
2. Determine expected net income and net cash flow for each year of this machine’s life. (Round answers
to the nearest dollar.)
3. Compute this machine’s payback period, assuming that
(Round the payback period to two decimals.)
4. Compute this machine’s accounting
each year. (Round the percentage return to two decimals.)
5. Compute the
flows occur at each year-end. Hint: Salvage value is a
the net present value to the nearest dollar.
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