Newman Automobiles Manufacturing is considering two alternative investment propo
ID: 2437311 • Letter: N
Question
Newman Automobiles Manufacturing is considering two alternative investment proposals with the following data:
Proposal X
Proposal Y
Investment
$10,000,000
$500,000
Useful life
5 years
5 years
Estimated annual net cash inflows for 5 years
$2,000,000
$95,000
Residual value
$50,000
$20,000
Depreciation method
Straight-line
Straight-line
Required rate of return
12%
10%
Calculate the average accounting net income for Proposal X.
$2,000,000
$1,950,000
$190,000
None of the above
Proposal X
Proposal Y
Investment
$10,000,000
$500,000
Useful life
5 years
5 years
Estimated annual net cash inflows for 5 years
$2,000,000
$95,000
Residual value
$50,000
$20,000
Depreciation method
Straight-line
Straight-line
Required rate of return
12%
10%
Explanation / Answer
Accounting net income = Net cash flow - Depreciation
= 2000000-(10000000-50000/5)
Accounting net income = 10000
So answer is d) None of the above