Capital Budgeting
Mason Co

Capital budgeting
Mason Co. is evaluating two alternative investment proposals. Below are data for each proposal:
The following information was taken from present value tables:
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):
(f) Based on your analysis, which proposal appears to be the best investment?
$$\begin{array} { l r r } \text { Initial investment cost } & \text { Proposal A } & \text { Proposal B } \\\text { Estimated useful life } & \$ 84,000 & \$ 96,000 \\\text { Estimated salvage value } & 5 \text { years } & 6 \text { years } \\\text { Estimated annual net income } & \$ 4,000 & - 0 - \\& \$ 8,200 & \$ 8,000\end{array}$$ $$\begin{array} { | l | r | } \hline & \text { Present Value } \\\hline \$ 1 \text { due in } 5 \text { years, discounted at } 12 \% \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots & .567 \\\hline \$ 1 \text { due in } 6 \text { years, discounted at } 12 \% \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots & .507 \\\hline \$ 1 \text { received annually for } 5 \text { years, discounted at } 12 \% \ldots \ldots \ldots \ldots \ldots & 3.605 \\\hline \$ 1 \text { received annually for 6 years, discounted at } 12 \% \ldots \ldots \ldots \ldots \ldots & 4.111 \\\hline\end{array}$$ $$\begin{array} { | l | l | l | } \hline & \text { Proposal A } & \text { Proposal B } \\\hline \text { (a) Annual net cash flow: } & \$ & \$ \\\hline \text { (b) Payback period (in years): } & \$ & \$ \\\hline \text { (c) Average investment: } & \$ & \$ \\\hline \text { (d) Return on average investment: } & \$--\% & \$--\% \\\hline \text { (e) Net present value: } & \$ & \$ \\\hline\end{array}$$