Marengo is a popular restaurant located in Chilton Resort. Management feels that enlarging the facility to incorporate a large outdoor seating area will enable Marengo to continue to attract existing customers as well as handle large banquet parties that now must be turned away. Two proposals are currently under consideration. Proposal A involves a temporary walled structure and umbrellas used for sun protection; Proposal B entails a more permanent structure with a full awning cover for use even in inclement weather. Although the useful life of each alternative is estimated to be 10 years, Proposal

B results in higher salvage value due to the awning protection. The accounting department of Chilton

Resort and the manager of Marengo have assembled the following data regarding 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 management’s required rate of return 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.
b. On the basis of your analysis in part a, state which proposal you would recommend and explain the reasons for your choice.

In Exhibits 26–3

In Exhibits 26–4

Transcribed Image Text:

Proposal A Proposal B $400,000 $500,000 Estimated life of fixtures. . . . . . .10 years 10 years Estimated salvage value. . . $20,000 $50,000 95,000 45,000 Estimated annual net cash flow.... . . . . .. .80,000 Depreciation (straight-line basis) . . . 38,000 Present Value of $1 Due in n Periods* Number of Periods Discount Rate 1% 1 % 5% 990 .985 980 971 971 956 961942 951.928 942 915 933 901 923 888 914 875 905 862 820742 788 700 699 6% 8% 10% 12% 15% 20% 952 943926 99 893 870 833 907 890 87 82797756 694 864840 794 751 712 658 579 823 792 735 683 636 572 482 784 74768 621 567 497 402 746 705 630 564 507 432 35 711 665 583 513 452376 279 677 627 540 47404327 233 645 592 500 424284 194 614 558 463 386 322 47162 377 312 215 49 104061 026 310 2478 102 066 035 013 173 123 063 032 017 007 001 2 3 4 6 7 10 20 24 36 585