Evaluating projects by the payback period and the rate of
return on investment. Four capital expenditure proposals received by the Duffy
Corporation are described below.
The treasurer of the company recommends that the projects be ranked according
to payback period. Management can select those projects from which the investment
will be recovered most rapidly. The controller recommends ranking the projects by
rate of return on investment.
Instructions
1. Calculate the payback period for each proposal. Round off your answer to one
decimal place. Rank the proposals in order by payback period.
2. Calculate the rate of return on investment for each proposal, using the initial
investment as the base. Round off to the nearest hundredth of a percent. Rank the
proposals in order by return on investment.
3. Which ranking would you prefer? Why?

Transcribed Image Text:

Investment Required Annual Cash Earnings Depreciable Life in Years Proposal A $280,000 Proposal B $1,600,000 $ 50,000 $ 300,000 Proposal C $1,600,000 $ 385,000 Proposal D $500,000 $ 70,000 12 25 10 22