Delta Corporation is considering two capital expenditure proposals. Both proposals are for similar products and both are expected to operate for four years. Only one proposal can be accepted. Depreciation is charged on the straight-line basis. Based on the information below:
Profit/(loss) Proposal A Proposal B
Initial investment $46,000 $46,000
Year 1 $6,500 $4,500
Year 2 $3,500 $2,500
Year 3 $13,500 $4,500
Year 4 Loss $1,500 Profit $14,500
Estimated scrap value at the end of Year 4 $4,000 $4,000
Calculate the following for both proposals:
1. The payback period to one decimal place.
2. The average rate of return on the initial investment, to one decimal place.