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 forthe two proposals:
Proposal 1 Proposal 2
Required investment inequipment.......................................$360,000 $350,000
Estimated service life ofequipment......................................8 years 7 years
Estimated salvagevalue................................................... $--0-- $14,000
Estimated annual cost savings (net cashflow)....................75,000 76,000
Depreciation on equipment (straight-linebasis)..................45,000 48,000
Estimated increase in annual netincome............................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 to the nearest tenth of a year and the return on investment to the nearest tenth of a percent.)
b. Based on your analysis in part a, state which proposal you would recommend and explain the reasons for your choice.