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Presented is information pertaining to the cash flows of three mutually exclusive investment proposals: Proposal A                     Proposal B             Proposal C Initial investment…………………………….................$60,000                           $60,000                  $60,000 Cash flow...

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Accounting

Presented is information pertaining to the cash flows ofthree mutually exclusive investment proposals:

ProposalA                    ProposalB            Proposal C

Initialinvestment…………………………….................$60,000                          $60,000                 $60,000

Cash flow from operations

Year1………………………………...............................50,000                              30,000                    60,000

Year2………………………………................................6,000                               30,000          

Year3………………………………...............................29,000                              25,000          

Disinvestment………………………………......................0                                      0                              0

Life (years)………………………………….....................3years                             3years                      1 year

Required

  1. Rank these investment proposals using the paybackperiod, the accounting rate of return on initial investment, andthe present value criteria. Assume that the organization’s cost ofcapital is 12 percent. Round calculations to four decimalplaces.
  2. Explain the difference in rankings. Which investmentwould you recommend?

Answer & Explanation Solved by verified expert
4.4 Ratings (676 Votes)
A Ranking on basis of Payback Period It is clear that in Proposal C the Investment gets returned in 1st year itself while in Proposal B it is happening in 2nd year and in case of Proposal A in 3rd year so Ranking would be as below 1st Rank Proposal C 2nd    See Answer
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