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 A Proposal B Proposal C
Initial Investment $45,000 $45,000 $45,000
Cash flow from operations
Year 1 $40,000 $22,500 $45,000
Year 2 5,000 $22,500
Year 3 22,500 22,500
Disinvestment 0 0 0
Life (Years) 3 years 3 years 1 year
a. Rank these investment proposals 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 12 percent. Round calculations to four decimal places.
b. Explain the difference in rankings. Which investment would you recommend?