Simms Manufacturing Is Considering Two Alternative Investment Proposals with the Following

question 135

True/False

Simms Manufacturing is considering two alternative investment proposals with the following data:
$\begin{array}{|l|r|r|}\hline &\text { Proposal X } & \text { Proposal Y } \\\hline \text { Investment } & \$ 620,000 & \$ 400,000 \\\hline \text { Useful life } & 8 \text { years } & 8 \text { years } \\\hline \text { Estimated annual net cash inflows for } 8 & & \\\text { years } & \$ 130,000 & \$ 80,000 \\\hline \text { Residual value } & \$ 0 & \$ 0 \\\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \\\hline \text { Discount rate } & 9 \% & 10 \% \\\hline\end{array}$

$$\begin{array} { | r | r | r | r | r | r | r | } \hline \begin{array} { r } \text { Present Value of } \\\text { an Annuity of \$1 }\end{array} & & & & & & \\ \hline 1 & 5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \% \\\hline 2 & 1.952 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \\\hline 3 & 2.723 & 2.83 & 1.808 & 1.783 & 1.759 & 1.736 \\\hline 4 & 3.546 & 3.465 & 2.624 & 2.577 & 2.531 & 2.487 \\\hline 5 & 4.329 & 4.21 & 4.100 & 3.312 & 3.240 & 3.170 \\\hline 6 & 5.076 & 4.917 & 4.767 & 4.623 & 3.890 & 3.79 \\\hline 7 & 5.786 & 5.58 & 5.389 & 5.206 & 5.033 & 4.355 \\\hline 8 & 6.463 & 6.210 & 5.971 & 5.747 & 5.535 & 5.335 \\\hline 9 & 7.108 & 6.80 & 6.515 & 6.247 & 5.995 & 5.759 \\\hline 10 & 7.722 & 7.360 & 7.024 & 6.710 & 6.418 & 6.145 \\\hline\end{array}$$
After calculating the net present value of the two alternatives, Proposal Y appears to deliver the most
favorable results.

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Definitions:

Income

The monetary payment received for goods or services, or profit from investments, typically calculated on a regular basis like annually or monthly.

Expected Utility Function

A mathematical expression that represents an individual's preferences over a set of outcomes, incorporating the probabilities of those outcomes.

Sure Payment

A guaranteed payment or financial transaction that is certain to occur.

Lottery

A form of gambling that involves drawing numbers at random for a prize, often regulated by governments.