Most Company has an opportunity to invest in one of two new projects. Project Y requires a $330,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $330,000 investment for new machinery with a four-year life and no salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
1 Net cash flow for each project
| Project Y | Project Z | |
| Net Income | 57400 | 37240 |
| Add: | ||
| Depriciation =330,000-0/5 =330000-0/4 |
66000 | 82500 |
| 123400 | 119740 |
2) Payback Period
It is calculated as Follow
| Year | ||
| 1 | 123400 | 123400 |
| 2 | 123400 | 246800 |
| 3 | 123400 | 370200 |
| 4 | 123400 | |
| 5 | 123400 |
Payback period for project 1 = 370200-330000
=40200
Period for 40200 is as follow
=40200*365/123400
=40 Days
So payback period for project Y is 2 year and 40 Days
Payback period for project Z
| Year | ||
| 1 | 119740 | 119740 |
| 2 | 119740 | 239480 |
| 3 | 119740 | 359220 |
| 4 | 119740 |
Payback period for project 1 = 359220-330000
=29220
Period for 29220 is as follow
=29220*365/119740
=30 Days
So payback period for project Y is 2 year and 30 Days
3) Project Accounting Rate of return
| Project Y | Project Z | |
| Net Income | 57400 | 37240 |
| Devided By (330,000/2) |
165000 | 165000 |
| 0.347878788 | 0.22569697 | |
| 37.78% | 22.56% |
4 NPV of the project
For project Y
| Year | Cash Flolw | Discout Factor@7% |
Prasent Value |
| 0 | -330,000 | 1 | -330000 |
| 1 | 123400 | 0.934579439 | 115327.1 |
| 2 | 123400 | 0.873438728 | 107782.3 |
| 3 | 123400 | 0.816297877 | 100731.2 |
| 4 | 123400 | 0.762895212 | 94141.27 |
| 5 | 123400 | 0.712986179 | 87982.49 |
| 175964.4 |
For Project Z
| Year | Cash Flolw | Discout Factor@7% |
Prasent Value |
| 0 | -330,000 | 1 | -330000 |
| 1 | 119740 | 0.934579439 | 111906.5 |
| 2 | 119740 | 0.873438728 | 104585.6 |
| 3 | 119740 | 0.816297877 | 97743.51 |
| 4 | 119740 | 0.762895212 | 91349.07 |
| 75584.68 |
