Question: 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
| 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: |
| Proposal 1 | Proposal 2 | |||||
| Required investment in equipment | $ | 360,000 | $ | 350,000 | ||
| Estimated service life of equipment | 8 | years | 7 | years | ||
| Estimated salvage value | $ | 0 | $ | 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 following. Assume discounted at an annual rate of 12 percent. Use Exhibits 26-3 and 26-4 where necessary. (Round your "PV factors" to 3 decimal places, payback period to the nearest tenth of a year and the return on average investment to the nearest tenth of a percent. Omit the "$" & "%" signs in your response.) |
| Proposal 1 | Proposal 2 | ||||
| (1) | Payback period | years | years | ||
| (2) | Return on average investment | % | % | ||
| (3) | Net present value | $ | $ | ||
| | |||||
| b. | On the basis of your analysis in part a, state which proposal you would recommend. | ||||
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