Capital Budgeting

Mason Co. is evaluating two alternative investment proposals. Below are data for each proposal: Proposal A Proposal B

Initial Investment cost $84,000 $96,000
Extimated useful life 5 years 6 years

Estimated salvage value $4,000 -0-

Estimated annual net income $8,200 $8,000

The following information was taken from present value tables Present value

$1 due 5 years, discounted at 12% .567 $1 due 6 years, discounted at 12% .507

$1 received annually for 5 years, discounted at 12% 3.605

$1 received annually for 6 years, discounted at 12% 4.111

All revenue and expenses other than depreciation will be received and paid in cash. The company uses a discount rate of 12% in evaluating all capital investments.

Compute the following for each proposal (round payback period to the nearest tenth of a year and round return on average investment to the nearest tenth of a percent):

	Proposal A	Proposal B
(a) Annual net cash flow:	$	$
(b) Payback period (in years):
(c) Average investment:	$	$
(d) Return on average investment:	%	%
(e) Net present value:	$	$

(f) Based on your analysis, which proposal appears to be the best investment?