chapter24probsetc - Problem Set C PROBLEM 24-1C Max...

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Problem Set C PROBLEM 24-1C Max Corporation is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a cost of $500,000. This machine is expected to have a five-year life and a $50,000 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 $850,000 Expected annual costs of new product Direct materials 200,000 Direct labor 175,000 Overhead excluding depreciation on new machine 100,000 Selling and administrative expenses 127,500 Income taxes 40% Required: 1. Compute straight-line depreciation for each year of this new machine’s life. 2. Determine expected net income and net cash flow for each year of this machine’s life. 3. Compute the payback period for this machine, assuming that cash flows occur evenly throughout each year. 4. Compute the accounting rate of return for this machine, assuming that income is earned evenly throughout each year. 5. Compute the net present value for this machine using a discount rate of 8% 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.) PROBLEM 24-2C Sheila and The Screamers have an opportunity to invest in one of two new types of recording equipment. Type 1 requires an investment of $150,000 for new equipment having a three-year life and no salvage value. Type 2 requires an investment of $150,000 for new machinery having a five-year life and no salvage value. The two projects yield the following predicted annual results (the depreciation expense on the new machines is included in the overhead line). The
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This note was uploaded on 09/23/2010 for the course FIN 310 taught by Professor Smith during the Fall '10 term at Arizona Western College.

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chapter24probsetc - Problem Set C PROBLEM 24-1C Max...

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