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...Expected annual costs of new product$1,840,000...... ....Direct materials .480,000Direct labor.....672,000336,000Overhead (excluding straight-line depreciation on new machine)Selling and administrative expenses...160,000Income taxes30% Required1. Compute straight-line depreciation for each year of this new machine's life. (Round depreciationamounts to the nearest dollar.)2. Determine expected net income and net cash flow for each year of this machine's life. (Round answersto 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 throughouteach 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 cashflows occur at each year-end. Hint: Salvage value is a cash inflow at the end of the asset's life. Roundthe net present value to the nearest dollar.

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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...
Expected annual costs of new product
$1,840,000
...... ....
Direct materials .
480,000
Direct labor.....
672,000
336,000
Overhead (excluding straight-line depreciation on new machine)
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.

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