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# Three proposals for Gavin and Alex for a nicrocomputer network

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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?

#### Solution Preview

a. Payback Method

Payback for Proposal A: Year 1 \$80,000
Year 2 10,000
Payback is 2 years \$90,000

Payback for Proposal B: Year 1 \$45,000
Year 2 45,000
Payback is 2 years \$90,000

Payback for proposal C: Year 1 \$90,000
Payback is 1 year

Net Present Value:

Proposal A: Predicted
Cash Flows Year(s) PV Factor PV of
Cash ...

#### Solution Summary

The solution evaluates three proposals for Gavin and Alex for a nicrocomputer network.

\$2.19