Question

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 X Proposal Y Proposal Z Initial investment $52,000 $52,000 $52,000 Cash flow from operations Year 1 50,000 26,000 52,000 Year 2 2,000 26,000 Year 3 27,000 27,000 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 10 percent. Round accounting rate of return four decimal places. Round net present value to the nearest whole number. Use negative signs with your answers, when appropriate. Proposal X Proposal Y Proposal Z Best proposal Payback period (years) Answer Answer Answer Answer Accounting rate of return Answer Answer Answer Answer Net present value Answer Answer Answer Answer

Answer 1

Best investment proposal using payback period, the accounting rate of return on initial investment, and the net present value criteria is as shown below:

Proposal X	Year 0	Year 1	Year 2	Year 3	Total
Initial investment	($52,000)				-52,000
Cash Flow from operations		50,000	2,000	27,000	79,000
Discount rate 10% , Life 3 years
Present Value factor	1	0.909	0.826	0.751
Present Value of Net Cash flow	-52,000	45,455	1,653	20,285
Net Present value	-52,000	45,455	1,653	20,285	15,393
Depreciation		17333.33	17333.33	17333.33	52,000
Accounting Income		67333.33	19333.33	44333.33	131,000
Average of accounting Income					43666.67
Initial investment					52,000
ARR = Average accounting profit/ Average amount invested					83.9744%
Payback period =	Initial Investment/ Cash inflow per year
		Cumulative cash flow
Year 0	-52,000	-52000
Year 1	50,000	-2,000
Year 2	2,000	0
Year 3	27,000	27,000
Payback period = 2 years
Proposal Y	Year 0	Year 1	Year 2	Year 3	Total
Initial investment	($52,000)				-52,000
Cash Flow from operations		26,000	26,000	27,000	79,000
Discount rate 10% , Life 3 years
Present Value factor	1	0.909	0.826	0.751
Present Value of Net Cash flow	-52,000	23,636	21,488	20,285
Net Present value	-52,000	23,636	21,488	20,285	13,409
Depreciation		17333.33	17333.33	17333.33	52,000
Accounting Income		43333.33	43333.33	44333.33	131,000
Average of accounting Income					43666.67
Initial investment					52,000
ARR = Average accounting profit/ Average amount invested					83.9744%
Payback period =	Initial Investment/ Cash inflow per year
		Cumulative cash flow
Year 0	-52,000	-52000
Year 1	26,000	-26,000
Year 2	26,000	0
Year 3	27,000	27,000
Payback period = 2 years
Proposal Z	Year 0	Year 1	Total
Initial investment	($52,000)		-52,000
Cash Flow from operations		52,000	52,000
Discount rate 10% , Life 3 years
Present Value factor	1	0.909
Present Value of Net Cash flow	-52,000	47,273
Net Present value	-52,000	47,273	-4,727
Depreciation		52000.00	52,000
Accounting Income		104000.00	104,000
Average of accounting Income			104,000
Initial investment			52,000
ARR = Average accounting profit/ Average amount invested			200.0000%
Payback period =	Initial Investment/ Cash inflow per year
		Cumulative cash flow
Year 0	-52,000	-52000
Year 1	52,000	0
Year 2
Year 3
Payback period = 1 years

Using NPV Best proposal is Proposal X

Using ARR best proposal is Proposal Z

Using Payback best proposal is Proposal Z