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

question 116

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

---

Definitions:

Marginal Revenue

The additional income earned from selling one more unit of a good or service.

Marginal Cost

The increase in total cost that arises from producing one additional unit of a product or service.

Economic Profit-Maximising

The point at which a firm achieves the highest profit possible given its production costs and market conditions.

Cost-Based Pricing

A pricing method used by companies to determine the selling price of a product by adding a profit margin to the total cost of producing or purchasing the product.