Nelson Equipment Company is evaluating two alternative investment opportunities. The controller of the company has prepared the following analysis of the two investment proposals. Items in addition to depreciation may have attributed to differences in the estimated annual cash flow and net income figures shown below.

Instructions
a. For each proposed investment, 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.

b. Based on your analysis in part a, which proposal do you consider to be the better investment? Explain.

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Required investment in equipment Estimated service life of equipment Estimated salvage value ... Estimated annual net cash flow Estimated annual net income ... Proposal A $600,000 6 years $120,000 150,000 100,800 Proposal B $525,000 7 years $ -0- 140,000 78,750