Handout 25(10-1 Capital Rationing Plasticon manufactures plastic containers used to package a variety of liquid consumer products (such as fabric softener, cleaners, shampoo, hair spray, and liquid soap). The containers are manufactured on a job-order basis to customer specifications. Plasticon has received five proposals for capital investment projects. Your job is to evaluate these proposals and rank them in the order in which they should be funded. Begin your analysis by computing the average rate of return and cash payback period for each proposal. Any project that has an average rate of return of less than 15 percent or a cash payback period of longer than five years should be eliminated from further consideration. After this initial screening, compute the net present value (using a 15 percent discount rate) and internal rate of return for the remaining projects. Rank the projects based on both their profitability and overall merit to the corporation (qualitative factors). Cost $200,000 $250,000 $325,000 $500,000 $400,000 10 $0 10 $0 Annual project income $17,000 $18,000 $33,000 $55,000 $65,500 $105,000 Life (in years) Residual value 10 $0 $0 $0 $45,000 $95,000 Annual net cash flows $42,000 $43,000 Project A: This proposal requests funds to purchase hardware and software that will allow the accounting department to process payroll in-house. Paychecks are currently processed by an outside payroll service company. The annual increase in net income and cash flows will result from cost savings if the payroll function is no longer contracted to an outside company. Project B: This proposal requests funds for new manufacturing equipment. This equipment will allow Plasticon to make containers as large as ten gallons. Currently, Plasticon can not make containers that are larger than three gallons Project C: This proposal requests funds for equipment to make stick-on labels that are applied to the plastic containers. Currently, all stick-on labels are ordered from another company. This supplier has not proven very reliable in meeting delivery deadlines. Project D: This proposal requests funds for automated manufacturing equipment that will reduce the cycle time from receipt of a customer order to delivery of that order. Plasticon's cycle time is currently seven days. The automated equipment will reduce that time to four days while saving costs due to the elimination of five jobs. It will also make Plasticon more competitive; the company's major competitor currently has a cycle time of five days Project E: This proposal requests funds for computerized drafting and design equipment that will allow engineers to complete manufacturing instructions on special orders more quickly. This equipment should reduce Plasticon's cycle time from seven to five days 4.968 4.799 4.639 4.487 4.344 4.207 4.078 5.650 5.426 5.216 5.019 4.833 4.659 4.494 10