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:
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Proposal A
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Proposal B
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Proposal C
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Initial investment in equipment
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$90,000
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$90,000
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$90,000
|
|
Annual cash increase in operations:
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|
|
|
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Year 1
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80,000
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45,000
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90,000
|
|
Year 2
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10,000
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45,000
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0
|
|
Year 3
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45,000
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45,000
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0
|
|
Salvage value
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0
|
0
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0
|
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Estimated life
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3 yrs
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3 yrs
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1 yr
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The company uses straight-line depreciation for all capital assets.
Required:
a. 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%.
b. Rank each proposal 1, 2, and 3 using each method separately. Which proposal is best? Why?