Capital Rationing Decision for a Service Company Involving Four Proposals Clearcast 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: Proposal Investment Year 5450,000 2 3 4 5 Income from Operations $ 30,000 30.000 20.000 10.000 (30,000) $ 60,000 $ 60,000 40.000 20,000 (10,000) (20,000) $ 90,000 $36,000 26,000 Net Cash Flow $ 120,000 120,000 110.000 100,000 60,000 $510,000 $ 100.000 80.000 60,000 Proposal 200.000 1 2 3 5 20,000 $290,000 $ 100.000 90,000 Proposal $320,000 1 2 3 90,000 4 16,000 16,000 $120,000 $92,000 72.000 Proposal D: $540,000 1 2 80,000 80,000 $ 140,000 $ 200,000 180,000 160.000 120,000 100,000 $ 760,000 3 12.000 8.000) $220,000 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. Present Value of $1 at Compound Interest 10% Year 6% 0.943 0.890 0.909 2 3 0.540 4 0.870 0.756 0.658 0.572 0.497 0.792 0.747 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.751 0.683 0.621 0.564 0.513 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 5 0.705 0.432 7 0.665 2 0.467 0.404 0.376 0.322 0.284 0.247 9 0.592 0.361 0.194 10 0.336 0.322 0.162 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. If required, round your answers to one decimal place. Average Rate of Return Proposal A % Proposal B % llll Proposal % Proposal D % 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 indicate which proposals should be accepted for further analysis and which should be rejected. If required, round your answers to one decimal place. Proposal Cash Payback Period Average Rate of Return Accept or Reject 4 yrs. Reject 2 yrs., 4 mos. Accept 3 yrs., 6mos. Reject 3 yrs. A % B % D % Accept 4. For the proposals accepted for further analysis in part (3), compute the net present value. Use a rate of 12% and the present value of $1 table above. Round to the nearest dollar. Note: Select the proposals in alphabetic order. Select the proposal accepted for further analysis. Proposal B Proposal D Present value of net cash flow total Less amount to be invested Net present value 5. Compute the present value index for each of the proposals in part (4). If required, round your answers to two decimal places. Note: Select the proposals in alphabetic order. Select proposal to compute Present value index. Present value index (rounded) Proposal B Proposal D