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: Income from Net Cash Investment Year Operations Flow Proposal A: $450,000 1 $ 30,000 $ 120,000 2 30,000 120,000 3 20,000 110,000 4 10,000 100,000 (30,000) 60,000 $ 60,000 $510,000 Proposal B: 200,000 1 $ 60,000 $ 100,000 2 40,000 80,000 3 20,000 60,000 4 (10,000) 30,000 5 (20,000) 20,000 $ 90,000 $290,000 Proposal C: $320,000 1 $ 36,000 $ 100,000 2 26,000 90,000 3 26,000 90,000 4 16,000 80,000 5 16,000 80,000 $120,000 $440,000 Proposal D: $540,000 1 $92,000 $ 200,000 2 72,000 180,000 52,000 160,000 4 12,000 120,000 Proposal D: $540,000 1 $92,000 $ 200,000 2 72,000 180,000 3 52,000 160,000 4 12,000 120,000 5 100,000 (8,000) $220,000 $760,000 The company's capital rationing policy requires a maximum cash payback period of 3 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 Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162 Required: 1. Compute the cash payback period for each of the four proposals. Cash Payback Period Proposal A 4 years Proposal B 2 years 4 months Chapter 26 Homework Proposal B eBook 2 years 4 months Proposal C Proposal D 3 years 6 months 3 years 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. Proposal A Proposal B Proposal C Proposal D Average Rate of Return 5.3 % 18 % 15 % 16.3 % 3. Using the following format, summarize the results of your computations in parts (1) and (2). By placing the computed 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 A 4 yrs. B 2 yrs., 4 mos. 3 yrs., 6 mos. D 3 yrs. Average Rate of Return Accept or Reject 15 X % Reject % Accept % Reject % 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 Present value of net cash flow total $ Less amount to be invested Net present value $ $ Proposal D Chapter 26 Homework eBook Average Rate of Return Accept or Reject 15 X % Reject % Accept % Reject % Accept Proposal Cash Payback Period A 4 yrs. B 2 yrs., 4 mos. C 3 yrs., 6 mos. D 3 yrs. 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 Present value of net cash flow total Less amount to be invested Net present value Proposal D $ 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. Proposal B Present value index (rounded) Proposal D 6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4). Proposal D Proposal B Rank 1st Rank 2nd 7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5). Rank 1st Proposal B Rank 2nd Proposal D