Capital Rationing Decision for a Service Company Involving Four Proposals

Renaissance Capital Group is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated operating income, and net cash flow for each proposal are as follows:

	Investment	Year		Operating Income		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.

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

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

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

Spanish Peaks Railroad Inc. is considering acquiring equipment at a cost of $264,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $66,000. The company's minimum desired rate of return for net present value analysis is 12%.

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.353	2.991
6	4.917	4.355	4.111	3.785	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

Compute the following:

a. The average rate of return, giving effect to straight-line depreciation on the investment. If required, round your answer to one decimal place. fill in the blank (it's not 35%)