Newman Automobiles Manufacturing Is Considering Two Alternative Investment Proposals with the Following

question 50

Multiple Choice

Newman Automobiles Manufacturing is considering two alternative investment proposals with the following data: $$\begin{array} { | l | r | r | } \hline & \text { Proposal X } & \text { Proposal Y } \\\hline \text { Investment } & \$ 10,000,000 & \$ 500,000 \\\hline \text { Useful life } & 5 \text { years } & 5 \text { years } \\\hline \text { Estimated annual net cash inflows for 5 years } & \$ 2,000,000 & \$ 95,000 \\\hline \text { Residual value } & \$ 50,000 & \$ 20,000 \\\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \\\hline \text { Required rate of return } & 12 \% & 10 \% \\\hline\end{array}$$ Calculate the payback period for Proposal X.

• A) 5 years
• B) 4 years
• C) 8 years
• D) 10 years

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Definitions:

Double-Declining Balance

A method of accelerated depreciation which doubles the normal depreciation rate, reducing the asset's book value more quickly in its early years.

Salvage Value

The estimated residual value of an asset at the end of its useful life.

Straight-Line Depreciation

A method of allocating an asset's cost evenly across its useful life.

Salvage Value

The estimated resale value of an asset at the end of its useful life, often considered during depreciation calculations.