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Schultz Manufacturing is considering two alternative investment proposals with the following details: ...

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Question

Accounting

  1. Schultz 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%

  1. You have been hired as a capital budgeting expert. You are to recommend to the senior management of Schultz the best investment option. What proposal do you recommend? You must support your answer. Please show all work.
  2. Schultz has informed you that they are concerned about the discount rate for both proposals. In fact, Schultz 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. Please show all work

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