Chapter 24 Computation of payback period, accounting rate of return, and net present value

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. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Compute straight-line depreciation for each year of this new machine’s life.

      480000 - 20,000/4 = 115,000

2. Determine expected net income and net cash flow for each year of this machine’s life.

3. Compute this machine’s payback period, assuming that cash flows occur evenly throughout each year.

4. Compute this machine’s accounting rate of return, assuming that income is earned evenly throughout each year.

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.)