Data Stream Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated income from operations, and net cash flow for each proposal are as follows:

The company’s capital rationing policy requires a maximum cash payback period of three years. In addition, a minimum average rate of return of 10% is required on all projects. If the preceding standards are met, the net present value method and present value indexes are used to rank the remaining proposals.

Instructions

1. Compute the cash payback period for each of the four proposals.

2. Giving effect to straight-line depreciation on the investments and assuming no estimated residual value, compute the average rate of return for each of the four proposals. Round to 1 decimal place.

3. Using the following format, summarize the results of your computations in (1) and (2). By placing a check mark in the appropriate column at the right, indicate which proposals should be accepted for further analysis and which should be rejected.

4. For the proposals accepted for further analysis in (3), compute the net present value. Use a rate of 10% and the present value of $1 table appearing in this chapter. Round to the nearest dollar.

5. Compute the present value index for each of the proposals in (4). Round to 2 decimal places.

6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in (4).

7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in (5). Round to 2 decimal places.

8. Based upon the analyses, comment on the relative attractiveness of the proposals ranked in (6) and(7).

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Net Cash Income from Flow Investment Year Operations $ 76,000 Proposal A: $720,000 $220,000 76,000 220,000 3 76,000 220,000 36,000 180,000 36,000 180,000 $ 40,000 84,000 $ 15,200 Proposal B: $124,000 2 59,200 3 15,200 40,000 5,200 (4,800) $ 20,000 4 30,000 20,000 5 $ 80,000 Proposal C: $300,000 2 20,000 80,000 20,000 3 80,000 4 20,000 80,000 (10,000) $ 35,000 50,000 $ 80,000 Proposal D: $225,000 35,000 80,000 3 20,000 65,000 4 20,000 65,000 65,000 20,000