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

(a) 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. Round accounting rate of return four decimal places. Round net present value to the nearest whole number.

	Proposal A	Proposal B	Proposal C	Best proposal
Payback period (years)
Accounting rate of return
Net present value