Question

CapitalBudgeting

Mason Co. is evaluating two alternative investment proposals.Below are data for each proposal:
Proposal A Proposal B

Initial Investment cost$84,000 $96,000
Extimated useful life 5 years 6 years

Estimated salvage value$4,000 -0-

Estimated annual netincome $8,200 $8,000

The following informationwas taken from present value tables
Present value

$1 due 5 years, discountedat 12% .567
$1 due 6 years, discounted at 12% .507

$1 received annually for 5years, discounted at 12% 3.605

$1 received annually for 6years, discounted at 12% 4.111

All revenue and expensesother than depreciation will be received and paid in cash. Thecompany uses a discount rate of 12% in evaluating all capitalinvestments.

Compute the following foreach proposal (round payback period to the nearest tenth of a yearand round return on average investment to the nearest tenth of apercent):

	Proposal A	Proposal B
(a) Annual net cash flow:	$	$
(b) Payback period (inyears):
(c) Average investment:	$	$
(d) Return on averageinvestment:	%	%
(e) Net present value:	$	$

(f) Based on youranalysis, which proposal appears to be the bestinvestment?