Answer:

Evaluation of segment performance: Organization which is divided into different segments based on activities, functions or products, their performance is evaluated by preparing contribution format income statement. It provides classification of cost into variable and fixed expenses, direct and indirect expenses which is required to keep a check on expenses. Such detailed data provide support in controlling the expenses and improv performance accordingly.

Return on investment: Return on investment is the ratio which describe the relationship between the net income and amount invested. This ratio depicts the performance of the business unit or segment by measuring the profits earned by investing specific amount in the business.

Fill the missing information in the table as given below:

Compute each missing item in the table as given below:

Investment A:

Compute return on average investment as given below:

Thus, return on average investment is 23.08%

Working note:

Compute average investment in proposal A as given below:

Thus, average investment for proposal A is $26,000.

Investment B:

Compute average net income from formula of return on investment as given below:

Thus, net income in proposal B is $7,000.

Working note:

Compute average investment for proposal B as given below:

Thus, average investment for proposal B is $25,000.

Investment C:

Compute average investment value of proposal C from formula of return on investment as given below:

Thus, average investment in proposal C is $27,000.

Compute estimated salvage value in proposal C as given below:

Thus, estimated salvage value in proposal C is $4,000.

Investment D:

Compute average investment value of proposal D from formula of return on investment as given below:

Thus, average investment in proposal D is $30,000.

Compute estimated salvage value in proposal D as given below:

Thus, investment value in proposal D is $56,000.

Answer:

a.

1.

Payback period:

• Payback period means the time period to get back the investment made in a project inform of returns. This is one of the most familiar techniques to compare investment alternatives.

• Generally, companies are interested in the projects having the shorter payback period because once the funds invested in the project were got back then the funds can be used for some other purpose which helps for the organization growth and development. In this method cash flows beyond payback period are not considered.

Payback period calculated using the formula:

Compute the Payback period of equipment:

Payback period for Proposal A is

and for Proposal B is

.

2.

Return on average investment can be computed:

Where,

Compute return on average investment:

Return on average investment for Proposal A is

and for Proposal B is

.

3.

Compute the net present value of each proposal:

Net present value for Proposal A is

and for Proposal B is

.

b.

It is better to invest in Proposal A and is because of following conditions:

• Payback period can't be considered singly, it is more useful only when we use other capital budgeting techniques.

• Average return on investment is more in case of Proposal A than Proposal B.

• Net present value of Proposal A is more than Proposal B.

Based on above points, it is better to invest in Proposal A.

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