- How can capital investment analysis help management teams make decisions on investments?
review the attachment and review the problem
PB 11-63 Capital rationing decision for a service company involving Obj. 2. 3. 5 four proposals V 5. Proposal B, 1.13 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 ow for each proposal are as follows: Income from Net Cash ExtEl TEIPLAIE Investment Year Operations 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 sew M Proposal B: $200,000 1 5 60,000 5100.000 2 40,000 80,000 3 20,000 60,000 4 (10,000) 30,000 5 (20,000) M $ 90,000 $290,000 (Continued) Income from Net Cash Investment Year Operations Flow Proposal C: $320,000 1 5 36.000 5100.000 2 26,000 90,000 3 26.000 90.000 4 16,000 80,000 5 16.000 80.000 $1 20.000 5440.000 Proposal D: $540,000 1 $ 92,000 $200,000 2 72,000 1 80,000 3 52.000 1 60,000 4 12,000 1 20,000 5 (8,000) 1 00,000 m w 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. Instructions 1. 2. Compute the cash payback period for each of the four proposals. 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.) Using the following format, summarize the results of your computations in parts (1) and (2). By placing the calculated amounts in the rst two columns on the left and by placing a check mark in the appropriate column to the right, indicate which proposals should be accepted for further analysis and which should be rejected. Cash Payback Average Rate Accept for Proposal Period of Return Further Analysis Reject A B C D 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 appearing in this chapter (Exhibit 2). Compute the present value index for each of the proposals in part (4). (Round to two decimal places.) Rank the proposals from most attractive to least attractive, based on the present values of net cash ows computed in part (4). Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5). Based on the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7). \fAverage Rate of Return Proposal A: Proposal B: Proposal C: Proposal D: Cash Payback Period Average Flat-e Accept for Years Months of Return Further nal sis?
