Acc102 Principles of Managerial Accounting: P26-2 Micro Technology is considering two alternative

Acc102 Principles of Managerial Accounting

Problem 26.2 Analyzing Capital Investment Proposals
Micro 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.

(Round the payback period to the nearest tenth of a year and the return on investment to the nearest tenth of a percent).
Proposal 1 Proposal 2
Required investment in equipment 360,000 350,000
Estimated service life of equipment (years) 8 7
Estimated salvage value - 14,000
Estimated annual cost savings (net cash flow) 75,000 76,000
Depreciation on equipment (straight-line basis) 45,000 48,000
Estimated increase in annual net income 30,000 28,000

Instructions:
a. For each proposal, compute the (1) payback period, (2) return on average investment, and (3) net present value, discounted at an annual rate of 12 percent. (round the payback period tot eh nearest tenth of a year and the return on investment to the nearest tenth of a percent.) Use this exhibit when necessary.
b. Based on your analysis in part a, state which proposal you would recommend and explain the reason for your choice
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