Question

Ranking Investment Proposals: Payback Period, Accounting Rate of Return, and Net Present Value
Presented is information pertaining to the cash flows of three mutually exclusive investment proposals:

	Proposal X	Proposal Y	Proposal Z
Initial investment	$52,000	$52,000	$52,000
Cash flow from operations
Year 1	50,000	26,000	52,000
Year 2	2,000	26,000
Year 3	27,000	27,000
Disinvestment	0	0	0
Life (years)	3 years	3 years	1 year

(a) Select the best investment proposal  using the payback period, the accounting rate of return on initial investment, and the net present value criteria. Assume that the organization's cost of capital is 10 percent.

• Round accounting rate of return four decimal places.

• Round net present value to the nearest whole number.

• Use negative signs with your answers, when appropriate.

	Proposal X	Proposal Y	Proposal Z	Best proposal
Payback period (years)	Answer Correct Mark 1.00 out of 1.00	Answer Correct Mark 1.00 out of 1.00	Answer Correct Mark 1.00 out of 1.00	AnswerXYZX,YX,ZY,Z Correct Mark 1.00 out of 1.00
Accounting rate of return	Answer Incorrect Mark 0.00 out of 1.00	Answer Incorrect Mark 0.00 out of 1.00	Answer Incorrect Mark 0.00 out of 1.00	AnswerXYZX,YX,ZY,Z Correct Mark 1.00 out of 1.00
Net present value	Answer Correct Mark 1.00 out of 1.00	Answer Correct Mark 1.00 out of 1.00	Answer Correct Mark 1.00 out of 1.00	AnswerXYZX,YX,ZY,Z Correct Mark 1.00 out of 1.00

Answer 1

Year	Proposal A	Proposal B	Proposal C
0	-52000	-52000	-52000
1	50000	26000	52000
2	2000	26000
3	27000	27000
Disinvestment	0	0	0
Life	3	3	1
Solution
	Proposal A	Proposal B	Proposal C	Best Proposal
Payback period (years)	2.00	2	1	Proposal C
Accounting rate of return	50.64%	50.64%	100.00%	Proposal C
Net Present value	$    15,392.94	$ 13,409.47	$      (4,727.27)	Proposal A
There is a difference in rankings due to the time value of money. We will select Project on the
basis of Net Present Value as it considers time value of money. Thus Project A would be
recommended.