Question
Marshall Technology is considering two alternative proposals for modernizing its production facilities. To provide a basis for selection, the cost accounting department has developed the
Marshall 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. Items in addition to depreciation may have attributed to differences in the estimated annual cash flow and net income figures shown below.
Proposal A | Proposal B | |||||
Required investment in equipment | $ | 640,000 | $ | 560,000 | ||
Estimated service life of equipment | 8 years | 7 years | ||||
Estimated salvage value | $ | 0 | $ | 70,000 | ||
Estimated annual net cash flow | 128,000 | 140,000 | ||||
Estimated increase in annual net income | 64,000 | 46,000 | ||||
Required: a. For each proposal, compute the following. Assume discounted at an annual rate of 12 percent. Use Exhibits 26-3 and 26-4 where necessary.
(1) Payback period (2) Return on average investment (3) Net present value
b. On the basis of your analysis in part a, state which proposal you would recommend.
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