# Financial and Managerial Accounting: P26.3A Cartor Industries is evaluating two alternative

Financial and Managerial Accounting Problems 26.3A Analyzing Capital Investment Proposals

Cartor Industries is evaluating two alternative investment opportunities. The controller of the company has prepared the following analysis of the two investment proposals:

Proposal A Proposal B

Required investment in equipment 220,000 240,000

Estimated service life of equipment 5 years 6 years

Estimated salvage value 10,000 0

Estimated annual net cash flow 60,000 60,000

Depreciation on equipment (straight-line basis) 42,000 40,000

Estimated annual net income 18,000 20,000

Instructions

a. For each proposed investment, compute the following. Assume discounted at an annual rate of 10 percent. Use Exhibits 26-3 and 26-4 where necessary. (Round your answers to 3 decimal payback period to the nearest tenth of a year and the return on average investment to the nearest tenth of a percent. Omit the $ signs in your response.)places,

1.Payback period

2. Return on average investment

3. Net present value

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

Cartor Industries is evaluating two alternative investment opportunities. The controller of the company has prepared the following analysis of the two investment proposals:

Proposal A Proposal B

Required investment in equipment 220,000 240,000

Estimated service life of equipment 5 years 6 years

Estimated salvage value 10,000 0

Estimated annual net cash flow 60,000 60,000

Depreciation on equipment (straight-line basis) 42,000 40,000

Estimated annual net income 18,000 20,000

Instructions

a. For each proposed investment, compute the following. Assume discounted at an annual rate of 10 percent. Use Exhibits 26-3 and 26-4 where necessary. (Round your answers to 3 decimal payback period to the nearest tenth of a year and the return on average investment to the nearest tenth of a percent. Omit the $ signs in your response.)places,

1.Payback period

2. Return on average investment

3. Net present value

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

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