Reference no: EM133096292
Question - Analyzing and computing payback period, accounting rate of return, and net present value - Aikman Company has an opportunity to invest in one of two projects. Project A requires a $240,000 investment for new machinery with a four-year life and no salvage value. Project B also requires a $240,000 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.
Sales project a. $250,000 project b. 200,000.
EXPENSES: direct materials project a. $35,000 project b. 25,000
Direct labor project a. 50,000 project b. 30,000
Overhead including depreciation project a. 90,000 project b. 90,000
Selling and admin expenses project a. 18,000 project b. 18,000
Total selling expenses project a. 193,000 project b. 163,000
Pretax income project a. 57,000 project b. 37,000
Income taxes (30%) project a. 17,100 project b. 11,100
Net income project a. 39,900 project b. 25,900
Required -
1. Compute each project's annual expected net cash flows.
2. Determine each project's payback period.
3. Compute each project's accounting rate of return.
4. Determine each project's net present value using 8% as the discount rate. For part 4 only, assume that cash flows occur at each year-end.
5. Identify the project you would recommend to management and explain your choice.