The following table shows two schedules of prospective

Question

The following table shows two schedules of prospective operating cash inflows, each of which requires the same net initial investment of $10,000 for a new system now:

                Annual Cash Inflows

Year       Plan A                    Plan B

1           $1,000                   $5,000

2           2,000                       4,000

3            3,000                       3,000

4          4,000                         2,000

5          5,000                         1,000

Total  $15,000                   $15,000

The required rate of return is 6%.  All cash inflows occur at the end of each year.  The initial investment has a five-year life with $0 residual value at the end of the fifth year. 

Compute the following (show your computation)

1. Net present value
2. Payback period
3. Internal rate of return (use Excel)
4. Accounting rate of return based on net initial investment (Assume straight-line depreciation.)
5. Which plan is more desirable using these four methods? Explain. (use the cutoff period of 3 years for payback period.)