# Ranking Projects-AARR, NPV, and Payback Period

See attached file.

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 Preview

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Based upon the computations in the attached ...

#### 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.