CH 25-6

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 income from operations, and net cash flow for each proposal are as follows:

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.

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.

Income Net Cash Investment Year from Flow Operations $ 64,000 64,000 64,000 24,000 24,000 $240,000 $ 26,000 26,000 $ 200,000 200,000 200,000 160,000 160,000 $920,000 $90,000 90,000 70,000 70,000 20,000 $340,000 Proposal A $680,000 2 3 4 Proposal B: $320,000 2 3 4 6,000 6,000 (44,000) $20,000