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Welsh Industries is evaluating two alternative investment opportunities. The controller of the company has prepared the...

Welsh Industries is evaluating two alternative investment opportunities. The controller of the company has prepared the following analysis of the two investment proposals. Proposal A Proposal B Required investment in equipment $ 400,000 $ 576,000 Estimated service life of equipment 5 years 6 years Estimated salvage value $ 80,000 $ 0 Estimated annual cost savings (net cash flow) 100,000 192,000 Depreciation on equipment (straight-line basis) 64,000 96,000 Estimated increase in annual net income 36,000 57,600 Required: a. For each proposed investment, compute the following. Assume discounted at an annual rate of 10 percent. Use Exhibits 26-3 and 26-4 where necessary. (1) Payback period (2) Return on average investment (3) Net present value b. Based on your computations in part a, which proposal do you consider to be the better investment?

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Answer #1
Project A Peroject B
Estimated annual cash savings 100000 192000
Estimated Annual net income 36000 57600
Investment 400000 576000
Average Investment 200000 288000
Payback peirod 4 3
Ratte of return 0.18 0.2
(Net income/Average investment)
Annuity factor @ 10% 3.7907 4.355
Present value of inflows 379070 836160
Less: Initial Investment 400000 576000
Net present value -20930 260160

Proposal B is better.

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