Mark Stradler is an ambitious young executive who has recently been appointed to the position of financial director of Parabis plc, a small listed company. Stradler regards this appointment as a temporary one, enabling him to gain experience before moving to a larger organization. He intends to leave Parabis in three years time with its share price standing high. As a result, he is particularly concerned that the reported profits of Parabis should be as high as possible in his third and final year with the company.

Parabis plc has recently raised $350,000 from a rights issue, and the directors are considering three ways of using these funds. Three projects (A, B, C) are being considered; each requires immediate purchase of an equipment costing $350,000. One project only can be undertaken, and the equipment for each project will have a useful life equal to that of the project, with no scrap value.

Stradler prefers project C because it is expected to show the highest accounting profit in the third year. However, he does not wish to reveal his real reasons for favouring project C, and so, in his report to the chairman, he recommends project C because it shows the highest IRR.

The following summary is taken from his report:

Net cash flows ($000)
Years	0	1	2	3	4	5	6	7	8	IRR %
Project A	-350	100	110	104	112	138	160	180		27.5
B	-350	40	100	210	260	160	-	-	-	26.4
C	-350	200	150	240	40	-	-	-	-	33.0

The chairman of the company is accustomed to projects being evaluated using both the payback and the accounting rate of return and is suspicious of the IRR as a means to select the preferred project. He has since asked for an independent report as to the most appropriate project to select. The companys cost of capital is 20% and a policy of straight-line depreciation is used to write off the cost of the equipment in the financial statements.

You are required to:

Calculate the payback period for each project.

Calculate the accounting rate of return for each project.

Explain to the chairman the time value of money and the role of cost of capital in evaluating the projects.

Advise the chairman, with detailed supporting calculations and relevant rationale, of two other alternative options by which the most profitable project could be selected from an objective perspective. State any assumptions made.