Bock Construction Company is considering four proposals for the construction of new loading facilities that will include the latest in ship loading/unloading equipment. After careful analysis,

the company's accountant has developed the following information about the four proposals:

Proposal 1 Proposal 2 Proposal 3 Proposal 4
Payback period 4 years 4.5 years 6 years 7 years
Net present value $80,000 $178,000 $166,000 $308,000
Internal rate of return 12% 14% 11% 13%
Accrual accounting rate of return 8% 6% 4% 7%

Required:
How can this information be used in the decision-making process for the new loading facilities? Does it cause any confusion?

Answer: The managers can use the information to determine which proposal is best under the various alternatives. This may be accomplished by ranking each alternative. Also, the managers must determine the factors that are the most important to the company. For example, if short-run risk is high, a short payback period may be highly desirable. In this case, Proposal 1 is best. However, if total cash returned is critical to the company's operations, then Proposal 4 is probably best.

Any time that multiple measures are used there may be confusion because very seldom will one proposal appear to be the best with all models. In this case, payback ranks Proposal 1 the best, NPV ranks Proposal 4 the best, IRR ranks Proposal 2 the best, and AARR ranks Proposal 1 the best. The importance of each ranking will depend upon the circumstances of the organization and the managers must be attuned as to what is most favorable.

The net present value and the internal rate-of-return methods are superior because they consider the time value of money.