Problem: Micro Tech is considering 2 alternative proposals for modernizing its production facilities. To provide a basis for selection the cost accounting dept has developed the following data regarding the expected annual operating results for the 2 proposals:
Proposal 1 Proposal 2
Required investment in equipment $360,000 $350,000
Est service life of equipment 8 years 7 years
Est salvage value $0 $14,000
Est annual cost savings (net cash flow) 75,000 76,000
Depreciation on equip (straight line basis) 45,000 48,000
Est increase in annual net income 30,000 28,000
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%. (round the payback period to the nearest tenth of a year and the return on investment to the nearest tenth of a percent)
B) On the basis of your analysis in part A, state which proposal you would recommend and explain the reason for your choice.