Hibbing 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.
______________________________________________ Proposal A _______ Proposal B
Required investment in equipment . . . . . . . . . . . . . . . . . . . . $560,000 . . . . . . . . . $490,000
Estimated service life of equipment . . . . . . . . . . . . . . . . . . . . 8 years . . . . . . . . . . . 7 years
Estimated salvage value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -0- . . . . . . . . . . $ 70,000
Estimated annual cost savings (net cash flow) . . . . . . . . . . . 112,000 . . . . . . . . . . 122,500
Depreciation on equipment (straight-line basis) . . . . . . . . . . . 70,000 . . . . . . . . . . . 60,000
Estimated increase in annual net income . . . . . . . . . . . . . . . . 56,000 . . . . . . . . . . . . 40,000
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.) Use Exhibits 26-3 and 26-4 where necessary.
Exhibit 26-3: Present Value of $1 Payable in n Periods

Exhibit 26-4: Present Value of a $1 Annuity Receivable Each Period for n Periods

b. On the basis of your analysis in part a, state which proposal you would recommend and explain the reasons for your choice.

Present Value of $1 Due In n Perlods* Discount Rate Number of Perlods 1% 990 980971 971 .956864 840794 751 712 .658 579 961 942823 .792 735 683 636 .572 482 951 942915 .746 .705 630 564 507 432 335 933 .901 .711.665 583 513 452 376 279 923 914 905862 614 .558 463 386 322 247 .162 820 742 .377312 215 149 .104 .061 026 788 .700 310 247 158 102 066 035 .013 699 1%% 5% 952 907 6% 8% 926 857 826 10% 15% 20% 833 .797 756 694 12% 985 943 909 893 87 0 2 3 4 5 6 928 .784 747 621 567 497 402 677 627 645 540 467 500424 361 404 327 284 233 194 9 10 20 875 592 36 585 173 123 063 .032 .017 007 001 Present Value of $1 to Be Recelved Perlodlcally for n Perlods Number of Perlods Discount Rate 1% 112% 5% 6% 8% 10% 12% 15% 20% 0.990 0.985 0.952 0.943 0.926 0.909 0.893 0.870 0.833 1.970 1956 1859 833 1.783 1.736 1.690 1.626 1.528 2.941 2.912 2.723 2.673 2.577 2.487 2.402 2.283 2.106 3.902 3.854 3.546 3.465 3.312 3.170 3.037 2.855 2.589 4.853 4.783 4.329 4.212 3.993 3.791 3.605 3.352 2.991 5.795 5.697 5.076 4.917 4.623 4.355 4.111 3.784 3.326 6.7286.598 5.786 5.582 5.206 4.868 4.564 4.160 3.605 7.652 7.486 6.463 6.210 5.747 5.335 4.968 4.487 3.837 8.566 8.361 7.108 6.802 6.247 5.759 5.328 4.772 4.031 9.471 9.222 7.722 7.360 6.710 6.145 5.650 5.019 4.192 18.046 17.169 12.462 11.470 9.818 8.514 7.469 6.259 4.870 21.243 20.030 13.799 12.550 10.529 8.985 7.784 6.434 4.937 30.108 27.661 16.547 14.621 11.717 9.677 8.192 6.623 4.993 2 3 5 6 9 10 20 36