Question
Clearcast Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated income from operations,
Clearcast Communications 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 Flow | |||
Proposal A: | $450,000 | 1 | $ 30,000 | $ 120,000 | ||
2 | 30,000 | 120,000 | ||||
3 | 20,000 | 110,000 | ||||
4 | 10,000 | 100,000 | ||||
5 | (30,000) | 60,000 | ||||
$ 60,000 | $510,000 | |||||
Proposal B: | 200,000 | 1 | $ 60,000 | $ 100,000 | ||
2 | 40,000 | 80,000 | ||||
3 | 20,000 | 60,000 | ||||
4 | (10,000) | 30,000 | ||||
5 | (20,000) | 20,000 | ||||
$ 90,000 | $290,000 | |||||
Proposal C: | $320,000 | 1 | $ 36,000 | $ 100,000 | ||
2 | 26,000 | 90,000 | ||||
3 | 26,000 | 90,000 | ||||
4 | 16,000 | 80,000 | ||||
5 | 16,000 | 80,000 | ||||
$120,000 | $ 440,000 | |||||
Proposal D: | $540,000 | 1 | $92,000 | $ 200,000 | ||
2 | 72,000 | 180,000 | ||||
3 | 52,000 | 160,000 | ||||
4 | 12,000 | 120,000 | ||||
5 | (8,000) | 100,000 | ||||
$220,000 | $ 760,000 |
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.
Cash Payback Period | |
Proposal A | 4 years3 years3 years 6 months2 years3 years 9 months4 years |
Proposal B | 2 years2 years 4 months3 years3 years 3 months4 years2 years 4 months |
Proposal C | 2 years3 years 3 months2 years 9 months3 years 6 months4 years3 years 6 months |
Proposal D | 3 years3 years 3 months2 years 3 months2 years 8 months3 years 10 months3 years |
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 | fill in the blank 5 % |
Proposal B | fill in the blank 6 % |
Proposal C | fill in the blank 7 % |
Proposal D | fill in the blank 8 % |
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 of Return | Accept or Reject | |
A | 2 yrs.3 yrs., 6 mos.4 yrs.2 yrs., 8 mos.4 yrs. | fill in the blank 10 % | AcceptRejectReject | |
B | 3 yrs., 4 mos.2 yrs., 4 mos.4 yrs.2 yrs., 8 mos.2 yrs., 4 mos. | fill in the blank 13 % | AcceptRejectAccept | |
C | 2 yrs.2 yrs., 8 mos.3 yrs., 6 mos.4 yrs.3 yrs., 6 mos. | fill in the blank 16 % | AcceptRejectReject | |
D | 3 yrs.2 yrs., 3 mos.2 yrs., 8 mos.4 yrs.3 yrs. | fill in the blank 19 % | AcceptRejectAccept |
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. Round to the nearest dollar.
Note: Select the proposals in alphabetic order.
Select the proposal accepted for further analysis. | Proposal AProposal BProposal CProposal DProposal B | Proposal AProposal BProposal DProposal CProposal D |
Present value of net cash flow total | $fill in the blank 23 | $fill in the blank 24 |
Less amount to be invested | $fill in the blank 25 | $fill in the blank 26 |
Net present value | $fill in the blank 27 | $fill in the blank 28 |
5. Compute the present value index for each of the proposals in part (4). If required, round your answers to two decimal places.
Note: Select the proposals in alphabetic order.
Select proposal to compute Present value index. | Proposal AProposal BProposal CProposal DProposal B | Proposal AProposal BProposal CProposal DProposal D |
Present value index (rounded) | fill in the blank 31 | fill in the blank 32 |
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