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Managerial Accounting

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Future Cash Flows Risky - Which Method?

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Your client is considering four projects that will use approximately the same capital investment. They only have enough capital to invest in one of the proposals. Here are the metrics computed using the project's expected returns:

Proposal 1 Proposal 2 Proposal 3 Proposal 4
Payback period 4 years 3.5 years 5 years 6 years
Net present value \$80,000 \$79,000 \$66,000 \$78,000
Internal rate of return 16% 14% 11% 16%
Accrual accounting rate of return 8% 6% 4% 7%

If the future cash flows are very uncertain, which method is likely to be weighed more heavily in determining which proposal to pursue?

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Payback period Net present value Internal rate of return Accrual accounting rate of return