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 Propsal B Propsal C

Initial Investment............................................................... 60000 60000 60000

Cash flow from oeprations:

Year 1 50000 30000 60000

Year 2 6000 30000

Year 3 29000 25000

Disinvestment 0 0 0

Life (years) 3 3 1

Required

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 organizations cost of capital is 12

percent. Round calculations to four decimal places.

b. Explain the difference in rankings. Which investment would you recommend?