Analyzing Capital Investment Proposals
Micro Technology is considering two alternative proposals for modernizing its production facilities. To provide a basis for selection, the cost accounting department has developed the following data regarding the expected annual operating results for the two proposals.
(Round the payback period to the nearest tenth of a year and the return on investment to the nearest tenth of a percent).
|
Proposal 1 |
Proposal 2 |
|
|
Required investment in equipment |
360,000 |
350,000 |
|
Estimated service life of equipment (years) |
8 |
7 |
|
Estimated salvage value |
– |
14,000 |
|
Estimated annual cost savings (net cash flow) |
75,000 |
76,000 |
|
Depreciation on equipment (straight-line basis) |
45,000 |
48,000 |
|
Estimated increase in annual net income |
30,000 |
28,000 |
Instructions:
a. For each proposal, compute the (1) payback period, (2) return on average investment, and (3) net present value, discounted at an annual rate of 12 percent. (round the payback period tot eh nearest tenth of a year and the return on investment to the nearest tenth of a percent.) Use this exhibit when necessary.
b. Based on your analysis in part a, state which proposal you would recommend and explain the reason for your choice