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	$92,000	$92,000	$92,000
Cash flow from operations
Year 1	90,000	46,000	92,000
Year 2	2,000	46,000
Year 3	47,500	47,500
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 14 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	Answer	Answer	AnswerXYZX,YX,ZY,Z
Accounting rate of return	Answer	Answer	Answer	AnswerXYZX,YX,ZY,Z
Net present value	Answer	Answer	Answer	AnswerXYZX,YX,ZY,Z

Answer 1

Payback period i $92000 there are I proposa X - saygact in period & year is d rewin years is $92000 Proposal Y payback - in beriod therefore 2 is years sehven 2 years I i $92000 therefore Proposal 2 payback - in peajod year i I renon i year

Accounting save of jedern Ibopusa x >_Tolol molit = 90,000 +20004 47.500 -9 2000 - : $ 47,500 Average_projit : $47500 = $15833.3 per year ARR = $ 15833.3 17.21-11 Xtoo: $92000 -*tog Proposal y Toteel Dott. 46000 + 46000 + 47,500 - 92000 = $ 47,500 Average profft : $ 15833.3 per year ARRE 158333 nov = 17.3) . 17.27 ti 92000A Boposal z Total profit = 92000 92000 $ since profit is zero, ARR is also zero

Net present Proposal x value (A Luvtal Juvestment (A) $ 92000 Besent value of cash Present Value factor 0.877 0.769 0.675 inflow (6) cash flow 90000 2000 present value 78930 1538 320625 47500 $112530.5 NPV (BA) $ 20530 5 Proposal Leitial Juvestment (A) $92000 of Present value PUF 0.877 0.769 0.675 cash cash flow 16oob 46000 41.500 inflow (8) Present hature 40342 35374 32062.5 $ 1077785 NPV $ 15778.5

Boposa) 2 suitical investment (n) $ 92000 of herent i I value Cash flow RUDD cash flows (B) PVP cashflow 0.877 $80684 $ 80684 NP -$11.316 Z best Paybesku..peujed (years) I IZ Accounting sale of scherm | 17:27-1 | 17-21 / Oxy Net Present xalue $ 205305 *15778.5 $-11316 L t