Question
Miura-Marquez Industries is evaluating two alternative investment opportunities. The controller, Andrea has prepared the following analysis of the two investment proposals. Items in addition to
Miura-Marquez Industries is evaluating two alternative investment opportunities. The controller, Andrea 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.
Proposal A Proposal B
Required investment in equipment $500,000 $600,000
Estimate service life of equipment 5 years 6 years
Estimated salvage value $ 80,000 $ 0
Estimated annual net cash flow 125,000 200,000
Estimated increase in annual net income 43,000 60,000
a. For each proposed investment, compute the payback period, the return on average investment, and the net present value, discounted at an annual rate of 10 percent.
b. Based on your computations in part a, which proposal do you consider to be the better investment? Explain.
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