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 $751,674 Investment $2,625,030 Investment $1,612,485 Investment $1,013,346 Income Income Net Cash Income from Operations Net Cash Flows Net Cash Year Income from Operations from Operations from Net Cash Flows Flows Flows Operations 1 $88,000 $220.000 $270,000 $198.000 $450,000 $380,000 $107.000 107.000 2 88,500 220,000 $900,000 900,000 900,000 198,000 270,275 270,550 380,000 450,000 450,000 3 380,000 198,000 198,000 220,000 220,000 220,000 107,000 107.000 4 270,825 450,000 89,000 89,500 90,000 $445,000 380.000 900,000 900,000 271,100 198,000 450,000 107,000 380,000 Total $4,500,000 $1,100,000 $1,352,750 $990,000 $535,000 $2,250,000 $1,900,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.79% 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 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 or 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 11 months Proposal Uniform 3 years 7 months Proposal Victor 2 years 8 months four 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 proposals. Round to one decimal place. Average Rate of Return 96 Proposal Sierra % Proposal Tango %6 Proposal Uniform % Proposal Victor for further analysis and which should be rejected. 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 Proposal Tango Reject Accept for further analysis Reject Accept for further analysis Proposal Uniform Proposal Victor 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. It 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) +14