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:

Project Name	Sierra		Tango		Uniform		Victor
	Investment	$820,008	Investment	$2,549,970	Investment	$1,108,345	Investment	$942,513
Year	Income from Operations	Net Cash Flows	Income from Operations	Net Cash Flows	Income from Operations	Net Cash Flows	Income from Operations	Net Cash Flows
1	$96,000	$240,000	$270,000	$900,000	$157,500	$350,000	$109,000	$390,000
2	96,500	240,000	270,275	900,000	157,500	350,000	109,000	390,000
3	97,000	240,000	270,550	900,000	157,500	350,000	109,000	390,000
4	97,500	240,000	270,825	900,000	157,500	350,000	109,000	390,000
5	98,000	240,000	271,100	900,000	157,500	350,000	109,000	390,000
Total	$485,000	$1,200,000	$1,352,750	$4,500,000	$787,500	$1,750,000	$545,000	$1,950,000

1. 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

The company's capital rationing policy requires a maximum cash payback period of three years. In addition, a minimum average rate of return of 20% 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.

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 5 months
Proposal Tango	2 years 10 months
Proposal Uniform	3 years 2 months
Proposal Victor	2 years 5 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	Reject
Proposal Victor	Accept for further analysis

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 subtraction or negative net present value.

Select the proposal accepted for further analysis.	Proposal Tango	Proposal Victor
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 Tango	Proposal Victor
Present value index (rounded)