ACCT434 Advanced Cost Management: Week 6 Problem 2 - Gavin and Alex

ACCT434 Advanced Cost Management
Week 6 Homework (Customer Profitability Capital Budgeting)

Problem 2:
Gavin and Alex, baseball consultants, are in need of a microcomputer network for their staff. They have received three proposals, with related facts as follows:
Proposal A Proposal B Proposal C
Initial investment in equipment 90,000 90,000 90,000
Annual cash increase in operations:
Year 1 80,000 45,000 90,000
Year 2 10,000 45,000 -
Year 3 45,000 45,000 -
Salvage value - - -
Estimated life 3 yrs 3 yrs 1 yr

The company uses straight-line depreciation for all capital assets.

Required:
a. Compute the payback period, net present value, and accrual accounting rate of return with initial investment, for each proposal. Use a required rate of return of 14%.
b. Rank each proposal 1, 2, and 3 using each method separately. Which proposal is best? Why?
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