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.................................. 8years 7 years
Estimated salvage value...................................................... $-0- $14,000
Estimated annual cost saving (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 (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 tot eh nearest tenth of a year and the return on investment to the nearest tenth of a percent.) Use this exhibits 26-3 and 26-4 where necessary.
b. Based on your analysis in part a, state which proposal you would recommend and explain the reason for your choice.