Response to the following problem:
Gavin and Alex, baseball consultants, are in need of a microcomputer network for their staff. They have received three proposals, with related facts as follows:
Proposal A Proposal B Proposal C
Initial investment in equipment:
$90,000 $90,000 $90,000
Annual cash increase in operations:
Year 1 80,000 45,000 90,000
Year 2 10,000 45,000 0
Year 3 45,000 45,000 0
Salvage value 0 0 0
Estimated life 3 yrs 3 yrs 1 yr
The company uses straight-line depreciation for all capital assets.
Question 1: Compute the payback period, net present value, and accrual accounting rate of return with initial investment, for each proposal. Use a required rate of return of 14%.
Question 2: Rank each proposal 1, 2, and 3 using each method separately. Which proposal is best? Why?