Capital Budgeting Mason Co. is evaluating two alternative investment proposals.

Question

Capital Budgeting

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 net income $8,200 $8,000

The following information was taken from present value tables
Present value

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

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

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

Proposal A

Proposal B

(a) Annual net cash flow:

$

$

(b) Payback period (in years):

  

(c) Average investment:

$

$

(d) Return on average investment:

   %

%

(e) Net present value:

$             

$

(f) Based on your analysis, which proposal appears to be the best investment?

Proposal A

Proposal B

(a) Annual net cash flow:

$

$

(b) Payback period (in years):

  

(c) Average investment:

$

$

(d) Return on average investment:

   %

%

(e) Net present value:

$             

$

Explanation / Answer

%u201C payback period

Proposal A = 84,000/8,2000 = 10.24 or 10 years

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Proposal B= 96,000/8,000 = 12 years
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Return on Avg inv:

Proposal 1 as 8,200/( 84,000 + 4,000) /2 = 18.6%
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Return on Avg inv:

Proposal 2 as 8,000/96,000 /2 = 16.7%

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Average Investment

Proposal 1: 84,000 +4,000/2= 44,000
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Proposal 2: 96,000/2= 48,000

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