Morris Company has an opportunity to invest in one of two projects. Project A requires a $480,000 Problem 11-2B investment for new machinery with a four-year life and no salvage value. Project B also requires a Analysis and computation of
$480,000 investment for new machinery with a three-year life and no salvage value. The two projects payback period, accounting rate
yield the following predicted annual results. The company uses straight-line depreciation, and cash flows of return, and net present value
occur evenly throughout each year.
P1 P2 P3
Project A Project B
Sales
$500,000 $400,000
Expenses
Direct materials
70,000 50,000
Direct labor
100,000 60,000
Overhead including depreciation
180.000 180,000
Selling and administrative expenses
36,000
36,000
Total expenses
386,000 326,000
Pretax income
114.000 74,000
Income taxes (30%)
34,200 22,200
Net Income
$ 51,800
5 79,800
Required
1. Compute each project's annual expected net cash flows. (Round net cash flows to the nearest dollar.)
2. Determine each project's payback period. (Round the payback period to two decimals.)
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 net present values to the nearest dollar.)
Check For Project A. (2) 24 years,
(3) 33.3% (1) 5181.758
Analysis Component
5. Identify the project you would recommend to management and explain your choice.