Capital Rationing Decision Involving Four Proposals

Kopecky Industries 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:

	Investment				Year	Income from Operations				Net Cash Flows
Proposal Sierra:	$850,000				1	$ 80,000				$ 250,000
					2	80,000				250,000
					3	80,000				250,000
					4	30,000				200,000
					5	(70,000)				100,000
						$200,000				$ 1,050,000
Proposal Tango:	$1,200,000				1	$320,000				$ 560,000
					2	320,000				540,000
					3	160,000				400,000
					4	60,000				300,000
					5	(40,000)				220,000
						$820,000				$2,020,000
Proposal Uniform:	$550,000				1	$ 90,000				$ 200,000
					2	90,000				200,000
					3	90,000				200,000
					4	90,000				200,000
					5	70,000				180,000
						$430,000				$ 980,000
Proposal Victor:	$380,000				1	$44,000				$ 120,000
					2	44,000				120,000
					3	44,000				120,000
					4	4,000				80,000
					5	4,000				80,000
						$140,000				$ 520,000

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

Required:

1. Compute the cash payback period for each of the four proposals. Assume that net cash flows are uniform throughout the year.

	Cash Payback Period
Proposal Sierra	3 years 6 months
Proposal Tango	2 years 3 months
Proposal Uniform	2 years 9 months
Proposal Victor	3 years 8 months

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.

	Average Rate of Return
Proposal Sierra	%
Proposal Tango	%
Proposal Uniform	%
Proposal Victor	%

3. Using the results from parts (1) and (2) determine which proposals should be accepted for further analysis and which should be rejected.

	Accept / Reject
Proposal Sierra	Reject
Proposal Tango	Accept for further analysis
Proposal Uniform	Accept for further analysis
Proposal Victor	Reject

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. If required, use the minus sign to indicate a negative net present value.

Select the proposal accepted for further analysis.	Proposal Sierra	Proposal Uniform
Present value of net cash flow total	$	$
Amount to be invested
Net present value	$	$

5. Compute the present value index for each of the proposals in part (4). Round to two decimal places.

Select the proposal to compute present value index.	Proposal Sierra	Proposal Uniform
Present value index (rounded)