Capital rationing decision for a service company involving OBJ. 2, 3, 5 four proposals Renaissance Capital Group 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:

Investment Year Income from Operations Net Cash Flow Proposal A: $680,000 1 $ 64,000 $200,000 2 64,000 200,000 3 64,000 200,000 4 24,000 160,000 5 24,000 160,000

$240,000 $920,000 Proposal B: $320,000 1 $ 26,000 $ 90,000 2 26,000 90,000 3 6,000 70,000 4 6,000 70,000 5 (44,000) 20,000

$ 20,000 $340,000 Proposal C: $108,000 1 $ 33,400 $ 55,000 2 31,400 53,000 3 28,400 50,000 4 25,400 47,000 5 23,400 45,000 $142,000 $ 250,000 Proposal D: $400,000 1 $100,000 $ 180,000 2 100,000 180,000 3 80,000 160,000 4 20,000 100,000 5 0 80,000 $300,000 $700,000 The company’s capital rationing policy requires a maximum cash payback period of three years. In addition, a minimum average rate of return of 12% 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 one decimal place.
3. Using the following format, summarize the results of your computations in parts (1)
and (2). By placing the calculated amounts in the first two columns on the left and by placing a check mark in the appropriate column to the right, indicate which proposals should be accepted for further analysis and which should be rejected.
Proposal Cash Payback Period Average Rate of Return Accept for Further Analysis Reject A B C D 4. For the proposals accepted for further analysis in part (3), compute the net present value.
Use a rate of 15% and the present value of $1 table appearing in this chapter (Exhibit 2).
5. Compute the present value index for each of the proposals in part (4). Round to two decimal places.
6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4).
7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5).
8. Based on the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7).
Problems: Series B