Factor Company is planning to add a new product to its line. Tomanufacture this product, the company needs to buy a new machine ata $540,000 cost with an expected four-year life and a $26,000salvage value. All sales are for cash, and all costs areout-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) fromthe tables provided. Round PV factor value to 4 decimalplaces.)
| | | |
| Expected annual sales of new product | $ | 1,990,000 | |
| Expected annual costs of new product | | | |
| Direct materials | | 486,000 | |
| Direct labor | | 678,000 | |
| Overhead (excluding straight-line depreciation on newmachine) | | 396,000 | |
| Selling and administrative expenses | | 166,000 | |
| Income taxes | | 30 | % |
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Required:
1. Compute straight-line depreciation for eachyear of this new machine’s life.
2. Determine expected net income and net cash flowfor each year of this machine’s life.
3. Compute this machine’s payback period, assumingthat cash flows occur evenly throughout each year.
4. Compute this machine’s accounting rate ofreturn, assuming that income is earned evenly throughout eachyear.
5. Compute the net present value for this machineusing a discount rate of 6% and assuming that cash flows occur ateach year-end. (Hint: Salvage value is a cash inflow atthe end of the asset’s life.)
