Explore BrainMass

Explore BrainMass

    Ranking Projects-AARR, NPV, and Payback Period

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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?

    © BrainMass Inc. brainmass.com June 3, 2020, 11:38 pm ad1c9bdddf
    https://brainmass.com/business/capital-budgeting/ranking-projects-aarr-npv-and-payback-period-289483

    Attachments

    Solution Preview

    See attached file.

    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.

    $2.19

    ADVERTISEMENT