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:

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.

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

In Exhibits 26–3

In Exhibits 26–4

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Proposal 1 $360,000 8 years Required investment in equipment Estimated service life of equipment. .. Estimated salvage value. Estimated annual cost savings (net cash flow). . . . - Depreciation on equipment (straight-line basis). . . . Estimated increase in annual net income Proposal 2 $350,000 7 years $14,000 76,000 48,000 28,000 .. 75,000 45,000 30,000 Present Value of $1 Due in n Periods* Number of Periods Discount Rate 1% 1 % 5% 990 .985 980 971 971 956 961942 951.928 942 915 933 901 923 888 914 875 905 862 820742 788 700 699 6% 8% 10% 12% 15% 20% 952 943926 99 893 870 833 907 890 87 82797756 694 864840 794 751 712 658 579 823 792 735 683 636 572 482 784 74768 621 567 497 402 746 705 630 564 507 432 35 711 665 583 513 452376 279 677 627 540 47404327 233 645 592 500 424284 194 614 558 463 386 322 47162 377 312 215 49 104061 026 310 2478 102 066 035 013 173 123 063 032 017 007 001 2 3 4 6 7 10 20 24 36 585