Q1. Proposals O and K each cost $500,000, have 6-year lives, and have predictable total cash flows of $720,000. Proposal O is expected to give equal annual net cash flows of $120,000, while the total cash flows for Proposal K are as given:
Year 1 $250,000
Year 2 200,000
Year 3 100,000
Year 4 90,000
Year 5 60,000
Year 6 20,000
$720,000
Evaluate the cash payback period for each proposal.
Q2. Carillion Company is considering the disposal of equipment that is no longer required for operations. The equipment initially cost $600,000 and accumulated depreciation to date totals $460,000. An offer has been received to lease the machine for its residual useful life for a total of $290,000, after which the equipment will have no salvage value. The repair, property tax and insurance expenses during the period of the lease are evaluated at $75,800. Alternatively, the equipment will be sold through a broker for $230,000 less a 10 percent commission.
Arrange a differential analysis report, dated 15th November of the present year, on whether the equipment should be leased or sold.