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.

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 15 percent. (Round the payback period 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.

Net Present Value
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