# Acc346 Managerial Accounting: P24-2A Pleasant Company has an opportunity to invest in one

Acc346 Managerial Accounting

P24-2A

Pleasant Company has an opportunity to invest in one of two new projects.

Property Y requires a $700,000 investment for new machinery with a four-year life and no salvage value.

Project Z requires a $700,000 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.

Project Y Project Z

Sales 700,000 560,000

Expenses

Direct materials 98,000 70,000

Direct labor 140,000 84,000

Overhead including depreciation 252,000 252,000

Selling and administrative expenses 50,000 50,000

Total expenses 540,000 456,000

Pretax income 160,000 104,000

Income taxes (30%) 48,000 31,200

Net income 112,000 72,800

Required:

1. Compute each project's annual expected net cash flows (Round the net cash flows to the nearest dollar).

2. Determine each projects payback period. (Round the payback period to two decimal places).

3. Compute each project's accounting rate of return. (Round the percentage return to one decimal).

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. (Round the net present value to the nearest dollar).

Analysis Component:

5. Identify the project you would recommend to management and explain your choice.

P24-2A

Pleasant Company has an opportunity to invest in one of two new projects.

Property Y requires a $700,000 investment for new machinery with a four-year life and no salvage value.

Project Z requires a $700,000 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.

Project Y Project Z

Sales 700,000 560,000

Expenses

Direct materials 98,000 70,000

Direct labor 140,000 84,000

Overhead including depreciation 252,000 252,000

Selling and administrative expenses 50,000 50,000

Total expenses 540,000 456,000

Pretax income 160,000 104,000

Income taxes (30%) 48,000 31,200

Net income 112,000 72,800

Required:

1. Compute each project's annual expected net cash flows (Round the net cash flows to the nearest dollar).

2. Determine each projects payback period. (Round the payback period to two decimal places).

3. Compute each project's accounting rate of return. (Round the percentage return to one decimal).

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. (Round the net present value to the nearest dollar).

Analysis Component:

5. Identify the project you would recommend to management and explain your choice.

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