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:
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Proposal A
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Proposal B
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Proposal C
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Initial Investment
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$45,000
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$45,000
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$45,000
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Cash flow from operations
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|
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Year 1
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$40,000
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$22,500
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$45,000
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Year 2
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5,000
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$22,500
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Year 3
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22,500
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22,500
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Disinvestment
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0
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0
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0
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Life (Years)
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3 years
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3 years
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1 year
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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 organization's cost of capital is 12 percent. Round calculations to four decimal places.
b. Explain the difference in rankings. Which investment would you recommend?