Jameson Manufacturing is considering two alternative investment proposals with the following details: Proposal A Proposal B...
- Jameson Manufacturing is considering two alternative investment proposals with the following details:
|
Proposal A |
Proposal B |
|
|
Investment, today |
$550,000 |
$275,000 |
|
Useful life |
5 years |
4 years |
|
Estimated annual net cash inflows |
$150,000 |
$90,000 |
|
Residual value |
$50,000 |
$0 |
|
Depreciation method |
Straight-line |
Straight-line |
|
Discount rate |
10% |
9% |
- You have been hired as a capital budgeting expert. You are to recommend to the senior management of Jameson the best investment option. What proposal do you recommend? You must support your answer.
- Jameson has informed you that they are concerned about the discount rate for both proposals. In fact, Jameson fears that they might be 200 basis points off on the discount rate for both proposals. Does this information have any effect on your decision for part (a.)? You must support your answer.
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