Mason Co. is evaluating two alternative investment proposals. Below are data for each proposal: Initial investment cost Estimated useful life..... Estimated salvage value. Estimated annual net income... Proposal A $84,000 5 years $ 4,000 $ 8,200 Proposal B $96,000 6 years -0- $ 8,000 The following information was taken from present value tables: $1 due in 5 years, discounted at 12%. $1 due in 6 years, discounted at 12%....... $1 received annually for 5 years, discounted at 12%.......... $1 received annually for 6 years, discounted at 12%... Present Value .567 .507 3.605 4.111 All revenue and expenses other than depreciation will be received and paid in cash. The company uses a discount rate of 12% in evaluating all capital investments. Compute the following for each proposal (round payback period to the nearest tenth of a year and round return on average investment to the nearest tenth of a percent):
Mason Co. is evaluating two alternative investment proposals. Below are data for each proposal: Initial investment cost Estimated useful life..... Estimated salvage value. Estimated annual net income... Proposal A $84,000 5 years $ 4,000 $ 8,200 Proposal B $96,000 6 years -0- $ 8,000 The following information was taken from present value tables: $1 due in 5 years, discounted at 12%. $1 due in 6 years, discounted at 12%....... $1 received annually for 5 years, discounted at 12%.......... $1 received annually for 6 years, discounted at 12%... Present Value .567 .507 3.605 4.111 All revenue and expenses other than depreciation will be received and paid in cash. The company uses a discount rate of 12% in evaluating all capital investments. Compute the following for each proposal (round payback period to the nearest tenth of a year and round return on average investment to the nearest tenth of a percent):
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:9.Capital budgeting
Mason Co. is evaluating two alternative investment proposals. Below are data
for each proposal:
Initial investment cost
Estimated useful life...
Estimated salvage value.
Estimated annual net income.
Proposal A
$84,000
$1 due in 5 years, discounted at 12%..
$1 due in 6 years, discounted at 12%..
$1 received annually for 5 years, discounted at 12%..
$1 received annually for 6 years, discounted at 12%..
5 years
$ 4,000
$ 8,200
The following information was taken from present value tables:
(a) Annual net cash flow:
(b) Payback period (in years):
(c) Average investment:
(d) Return on average investment:
(e) Net present value:
All revenue and expenses other than depreciation will be received and paid in
cash. The company uses a discount rate of 12% in evaluating all capital
investments.
Compute the following for each proposal (round payback period to the nearest
tenth of a year and round return on average investment to the nearest tenth
of a percent):
Proposal A
$
Proposal B
$96,000
6 years
-0-
$ 8,000
$
Present Value
.567
.507
3.605
4.111
$
%
Proposal B
$
$
$
%
(f) Based on your analysis, which proposal appears to be the best investment?
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