Hibbing Technology is considering two alternative proposals for modernizing its production facili- ties. 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. Proposal A Proposal B Required investment in equipment $560,000 $490,000 Estimated service life of equipment 8 years 7 years $ 70,000 Estimated salvage value $4 -0- Estimated annual cost savings (net cash flow) 112,000 122,500 Depreciation on equipment (straight-line basis) 70,000 60,000 Estimated increase in annual net income 56,000 40,000 Instructions 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 to the nearest tenth of a year and the return on investment to the nearest tenth of a percent.) Use Exhibits 26-3 and 26-4 where necessary. a. b. On the basis of your analysis in part a, state which proposal you would recommend and explain the reasons for your choice.
Hibbing Technology is considering two alternative proposals for modernizing its production facili- ties. 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. Proposal A Proposal B Required investment in equipment $560,000 $490,000 Estimated service life of equipment 8 years 7 years $ 70,000 Estimated salvage value $4 -0- Estimated annual cost savings (net cash flow) 112,000 122,500 Depreciation on equipment (straight-line basis) 70,000 60,000 Estimated increase in annual net income 56,000 40,000 Instructions 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 to the nearest tenth of a year and the return on investment to the nearest tenth of a percent.) Use Exhibits 26-3 and 26-4 where necessary. a. b. On the basis of your analysis in part a, state which proposal you would recommend and explain the reasons for your choice.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
26.2A
Transcribed Image Text:Chapter 26 Capital Budgeting
Hibbing Technology is considering two alternative proposals for modernizing its production facili-
ties. 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.
Proposal A
Proposal B
Required investment in equipment.
$560,000
$490,000
Estimated service life of equipment
8 years
7 years
Estimated salvage value.
2$
-0-
$ 70,000
Estimated annual cost savings (net cash flow)
112,000
122,500
Depreciation on equipment (straight-line basis)
70,000
60,000
Estimated increase in annual net income
56,000
40,000
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 to
the nearest tenth of a year and the return on investment to the nearest tenth of a percent.) Use
Exhibits 26-3 and 26-4 where necessary.
b. On the basis of your analysis in part a, state which proposal you would recommend and
explain the reasons for your choice.
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