Question: Aikman Company has an opportunity to invest
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.
Required1. 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.)
Analysis Component
5. Identify the project you would recommend to management and explain your choice.
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Project A Project B Sales. $250,000 $200,000 Expenses Direct materials.. Direct labor ... Overhead including depreciation 35,000 25,000 50,000 30,000 90,000 90,000 Selling and administrative expenses 18,000 18,000 Total expenses 193,000 163,000 Pretax income 57,000 37.000 Income taxes (30%) 17,100 I1,100 Net income... $ 39,900 $ 25.900
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