Allister Company has a number of potential capital investments. Because these projects vary in nature, initial investment, and time horizon, management is finding it difficult to compare them.

Project 1: Retooling Manufacturing Facility This project would require an initial investment of \($5\) million. It would generate \($750,000\) in additional cash flow each year. The new machinery has a useful life of eight years and a salvage value of $500,000.

Project 2: Purchase Patent for New Product The patent would cost \($3,400,000\), which would he fully amortized over five years. Production of this product would generate \($1,200,000\) additional annual net income for Allister.

Project 3: Purchase a New Fleet of Delivery Trucks Allister could purchase 25 new delivery trucks at a cost of \($75,000\) each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of \($5,000\). Purchasing the fleet would allow Allister to expand its customer territory resulting in \($500,000\) of additional net income per year.

Required:

1. Determine each project’s accounting rate of return.

2. Determine each project’s payback period.

3. Using a discount rate of 10 percent, calculate the net present value of each project.

4. Determine the profitability index of each project and prioritize the projects for Allister.