Compute each projects accounting rate of return

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Reference no: EM13788998

Most Company has an opportunity to invest in one of two new projects. Project Y requires a $350,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $350,000 investment for new machinery with a three-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. (PV of $1, FV of $1, PVA of $1, and FVA of $1

Project Y Project Z

Sales $ 350,000 $ 280,000

Expenses

Direct materials 49,000 35,000

Direct labor 70,000 42,000

Overhead including depreciation 126,000 126,000

Selling and administrative expenses 25,000 25,000

Total expenses 270,000 228,000

Pretax income 80,000 52,000

Income taxes (30%) 24,000 15,600

Net income $ 56,000 $ 36,400

1. determine each project's payback period

2. compute each project's accounting rate of return

3. determine each project's net present value using 8% as the discount rate. Assume that cash flows occur at each year-end

Reference no: EM13788998

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