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: Operating Net Cash Investment Year Income Flow Proposal A: $500,000 1 $ 45,000 $ 145,000 N 40,000 140,000 W 25,000 125,000 20,000 120,000 5,000 105,000 $135,000 $635,000 Proposal B: $400,000 $ 40,000 $ 120,000 20,000 100,000 W N 10,000 90,000 A 10,000 90,000 5,000 86,000 $ 86,000 $486,000 Proposal C: $380,000 $ 54,000 $ 130,000 49,000 125,000 W 49,000 125,000 A 44,000 120,000 Un 44,000 120,000 $240,000 $620,000 Proposal D: $675,000 $135,000 $270,000 N 120,000 255,000 W 90,000 225,000 15,000 150,000 un 10,000 145,000 $370,000 $1,045,000The company's capital rationing policy requires a maximum cash payback period of 3 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. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 N 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 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 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 Proposal B Proposal C Proposal D 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 % Proposal C 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 oi Return Accept or Reject a _. E ~ 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 51 table above. Round to the nearest dollar. Select the proposal accepted for further analysis. ' ' Present value of net cash ow total 33:] $E Less amount to be invested [:1 E Net present value $E $E 5. Compute the present value index for each of the proposals in part [4). If required, round your answers to two decimal places. Select proposal to compute Present Value index. ' ' Present value index (rounded) I: I: 6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part [4). Rank lst V Rank 2nd V 7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part [5). Rank 1st V Rank 2nd V 8. The analysis indicates that although Proposal V has the larger net present value, it is not as attractive as Proposal V in terms of the amount of present value per dollar invested. Proposal V requires the larger investment. Thus, management should use investment resources for Proposal V before investing in Proposal V , absent any other qualitative considerations that may impact the decision