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

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 12 percent..

Note: Follow rounding instructions noted for each computation. Use a negative sign with your answers, when appropriate.

	Proposal A	Proposal B	Proposal C	Best proposal
Payback period (years)	Answer	Answer	Answer	Which Proposal(s)?
Accounting rate of return; Round answers to 4 decimal places.	Answer	Answer	Answer	Which Proposal(s)?
Net present value; Round answers to nearest whole number.	Answer	Answer	Answer	Which Proposal(s)?