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

question 38

Multiple Choice

Newman Automobiles Manufacturing is considering two alternative investment proposals with the following data: $$\begin{array} { | l | r | r | } \hline & \text { Proposal } X & \text { Proposal Y } \\\hline \text { Investment } & \$ 10,700,000 & \$ 580,000 \\\hline \text { Useful life } & 5 \text { years } & 5 \text { years } \\\hline \text { Estimated annual net cash inflows for 5 years } & \$ 2,140,000 & \$ 103,000 \\\hline \text { Residual value } & \$ 50,000 & \$ 26,000 \\\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \\\hline \text { Required rate of return } & 12 \% & 13 \% \\\hline\end{array}$$ Calculate the payback period for Proposal X.

• A)5 years
• B)4 years
• C)9 years
• D)8 years

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Definitions:

Cash Outflow

Refers to the payment of money in the form of cash or cash equivalents by a business for various purposes, including operating expenses, investment activities, and financing activities.

Direct Method

A way of presenting a cash flow statement where major classes of gross cash receipts and payments are disclosed, providing insight into the sources and uses of cash.

Cash Paid

The total amount of cash disbursed by a company for various purposes, including operating expenses, investing activities, and financing activities.

Insurance

A contractual arrangement in which one party agrees to compensate another for specified loss, damage, illness, or death in exchange for a premium.