Micro Technology is considering 2 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: .... Required investment in equipment: Proposal 1 = $360,000... Proposal 2 = $350,000.... Estimated service life on equipment: Proposal 1 = 8 years... Proposal 2 = 7 years... Estimated salvage value: Proposal 1 = $-0- ... Proposal 2 = $14,000... Estimated annual cost savings (net cash flow): Proposal 1 = 75,000... Proposal 2 = 76,000.... Depreciation on equipment (straight line basis): Proposal 1 = 45,000... Proposal 2 = 48,000...... Estimated increase in annual net income: Proposal 1 = 30,000... Proposal 2 = 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 to the nearest 10th of the year and the return 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 reasons for your choice.