The following relates to a proposed equipment purchase: Cost $160,000 Salvage value 6,500 Estimated useful life 4 years $ 54,100 Straight-line Annual net cash flows Depreciation method Ignoring income taxes, the annual net income amount used to calculate the accounting rate of return is: Multiple Choice $52,475 $92,475 $17,350 $15,725

The management of Ortega Manufacturing has three different proposals under consideration. The Accounting Department has prepared the following information: Proposal B $ 2,450,000 Proposal C $ 2,055,000 Initial investment Useful life of equipment Estimated salvage value Payback period Net present value discounted at 15%* Which of the above proposals generates the greatest annual cash flow? Multiple Choice Proposal A Proposal B Proposal C Proposal A $ 3,100,000 Cannot be determined with the given information 7 Years $0 4.2 Years $ (30,000) 7 Years $ 400,000 4.4 Years $ 21,600 7 Years $ 100,000 4 Years $ 15,800

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Input area: Initial investment Pretax salvage value Cost savings per year Cost savings per year $ Working capital reduction Annual depreciation charge Aftertax salvage value 69 69 69 SA SA SA SA $ 535,000 $ 30,000 $ 150,000 100,000 $ 60,000 $ 107,000 $ 22,800 Tax rate Required return *Depreciation straight-line over life 24% 11% 5 Output area: NPV 150,000 cost savings $ 100,000 Year Cash flow Year 0 $ (475,000) 0 $ 1 139,680 1 2 139,680 234L 139,680 139,680 5 102,480 Accept/Reject Required pretax cost savings: NPV w/o OCF Required OCF OCF less dep. tax shield Cost savings $ 69 69 69 $ (497,076.39) $ 134,494.11 108,814.11 2345 cost savings Cash flow (475,000) 101,680 101,680 101,680 101,680 64,480