Question

The problem score will be awarded taking into consideration the process performed to arrive at the answers (calculations), so you must write how you made the calculations. · Luis and Alex, consultants, need a computer network for the use of their employees. They have before them three different proposals whose data are reflected in the following table. Proposal A Proposal B Proposal C Initial investment - 90,000 80,000 70,000 purchase of equipment Annual cash increase of operations per year: Year 1 50,000 45.000 15.000 Year 2 30,000 35,000 75,000 Year 3 35,000 20,000 Estimated useful life L 3 years 3 years 2 years 0 The assets shown in this table depreciate in a straight line. Use the data in the table to answer the following questions: Calculate the recovery period (payback period (6 points)

Answer 1

Answer to Question II
	Payback period
	Proposal I	Proposal II	Proposal III
Initial investment - Purchase of equipment	90000	80000	70000
Year 1	50000	45000	15000
Year 2	30000	35000	75000
Year 3	35000	20000	0
Payback period (in years) = Initial investment/ Cash inflow	2+10000/35000	80000/(45000+35000)	1+55000/75000
Payback period (in years)	2.29	2	1.73
Calulation of accounting rate of return
Inflows	Proposal I	Proposal II	Proposal III
Year 1	50,000	45,000	15,000
Year 2	30,000	35,000	75,000
Year 3	35,000	20,000	-
Less: Depreciation	-30,000	-26,667	-35,000
Total profit of project	85,000	73,333	55,000
Average Annual profit	85000/3	73333/3	55000/3
	28,333.33	24,444.33	18,333.33
Average investment	90000	80000	70000
Accounting rate of return	Average profit /Average investment
	31%	31%	26%
Proposal I & II both have same ARR, but Proposal I has higher average profit so it is most recommended in order and all proposal are acceptable because ARR is greater than required rate of return which is 14%.
Order to be like this:
Proposal I	Most recommended
Proposal II
Proposal III
Answer to Question III	(In $) per unit
Desired profit on current selling price	1.35*30%
	0.41
Revised selling price	1.30
So, target cost should be = Revised selling price - desired profit	1.30 - 0.41
Target cost	0.89