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Micro Tech is considering 2 alternative proposals for modernizing its production facilities. To provide a basis for selection the cost accounting dept has developed the following data regarding the expected annual operating results for the 2 proposals:

Proposal 1 Proposal 2
Required investment in equipment $360,000 $350,000
Est service life of equipment 8 years 7 years
Est salvage value $0 $14,000
Est annual cost savings (net cash flow) 75,000 76,000
Depreciation on equip (straight line basis) 45,000 48,000
Est increase in annual net income 30,000 28,000

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%. (round the payback period to the nearest tenth of a year and the return on investment to the nearest tenth of a percent)

B-On the basis of your analysis in part A, state which proposal you would recommend and describe the reason for your choice...

 

Basic Finance, Finance

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