Question: You have been asked to evaluate 2 projects using only profitability models.

a) Show the formula and calculate the Average (Accounting) Rate of Return (ARR) and Payback Period (PBP) for the following projects without considering the time value of money. (4 marks)

b) If you were deciding based solely on Average (Accounting) Rate of Return results, which project would you select? (1 mark)

c) If you were deciding based solely on Payback Period results, which project would you select? (1 mark)

Project Orange	Project Banana
Initial investment = $400,000	Initial investment = $180,000
Annual Net Cash Flow = $40,000	Annual Net Cash Flow = $60,000
Average Annual Profit = $20,000	Average Annual Profit = $20,000

a) Calculation for ARR and Calculation for PBP

b) Based on Average (Accounting) Rate of Return (ARR), I would select Project _____________.

c) Based on Payback Period (PBP), I would select Project _____________.