Hibbing Technology is considering two alternative proposals for modernizing its production facilities. To provide a basis for

Question:

Hibbing 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 A _______ Proposal B
Required investment in equipment . . . . . . . . . . . . . . . . . . . . $560,000 . . . . . . . . . $490,000
Estimated service life of equipment . . . . . . . . . . . . . . . . . . . . 8 years . . . . . . . . . . . 7 years
Estimated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -0- . . . . . . . . . . $ 70,000
Estimated annual cost savings (net cash flow) . . . . . . . . . . . 112,000 . . . . . . . . . . 122,500
Depreciation on equipment (straight-line basis) . . . . . . . . . . . 70,000 . . . . . . . . . . . 60,000
Estimated increase in annual net income . . . . . . . . . . . . . . . . 56,000 . . . . . . . . . . . . 40,000
Instructions
a. For each proposal, compute the
(1) Return on average investment, and
(3) , discounted at an annual rate of 12 percent. (Round the to the nearest tenth of a year and the return on investment to the nearest tenth of a percent.) Use Exhibits 26-3 and 26-4 where necessary.
Exhibit 26-3: Present Value of $1 Payable in n Periods

Exhibit 26-4: Present Value of a $1 Annuity Receivable Each Period for n Periods

b. On the basis of your analysis in part a, state which proposal you would recommend and explain the reasons for your choice.

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