Ranking Projects-AARR, NPV, and Payback Period
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Timmons Corporation is considering three long-term capital investment proposals. Relevant data on each project are as follows.
Project
Brown Red Yellow
Capital investment
$190,000
$220,000
$250,000
Annual net income:
Year 1 25,000 20,000 26,000
2 16,000 20,000 24,000
3 13,000 20,000 23,000
4 10,000 20,000 17,000
5
8,000
20,000
20,000
Total
$72,000
$100,000
$110,000
Salvage value is expected to be zero at the end of each project. Depreciation is computed by the straight-line method. The company's minimum rate of return is the company's cost of capital which is 12%.
Instructions
Compute the following and rank the projects for each category:
Compute the average annual rate of return for each project. (Round your answers to 1 decimal place.)
Brown % rank
Red % rank
Yellow % rank
Compute the cash payback period for each project. (Round your answers to 2 decimal places.)
Brown years rank
Red years rank
Yellow years rank
Compute the net present value for each project. (Round your answers to 0 decimal places.)
Brown $ rank
Red $ rank
Yellow $ rank
Which project do you recommend?
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Solution Summary
Using an Excel 97-2003 spreadsheet, this solution illustrates how to rank projects by their average annual rates of return, payback periods, and net present values. It then explains why one ranking system is preferred over another.
Solution Preview
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