Micro Technology is considering two alternative proposals for modernizing its pr
ID: 2380803 • Letter: M
Question
Micro Technology is considering two alternative proposals for modernizing its production facilities. 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:
For each proposal, compute the following. Assume discounted at an annual rate of 12 percent. Use Exhibits 26-3 and 26-4 where necessary. (Round your "PV factors" to 3 decimal places, payback period to the nearest tenth of a year and the return on average investment to the nearest tenth of a percent. Omit the "$" & "%" signs in your response.)
On the basis of your analysis in part a, state which proposal you would recommend.
Micro Technology is considering two alternative proposals for modernizing its production facilities. 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:
Micro Technology is considering two alternative proposals for modernizing its production facilities. To provide a basis for selection, the cost accounting department has developedExplanation / Answer
Hi,
Please find the answers as follows:
Part 1: Payback Period
Payback Period = Initial Investment/Annual Cash Flow
Proposal 1 = 360000/75000 = 4.80 or 4.8
Proposal 2 = 350000/76000 = 4.61 or 4.6
Part 2: Return on Average Investment
Return on Average Investment = Annual Income/Average Investment
Proposal 1 = 30000/360000/2*100 = 16.67% or 16.7%
Proposal 2 = 28000/350000/2*100 = 16%
Part 3: NPV
Proposal 1 = - 360000 + 75000*4.968 = 12600
Proposal 2 = - 350000 + 76000*4.564 + 14000*.452 = 3192
Proposal 1 should be accepted as it offers a higher Return on Average Investment and NPV.
Thanks.
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