Question
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,
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 | $1,791,650 | Investment | $966,680 | |
| Year | Income from Operations | Net Cash Flows | Income from Operations | Net Cash Flows | Income from Operations | Net Cash Flows | Income from Operations | Net Cash Flows |
| 1 | $77,000 | $220,000 | $279,000 | $900,000 | $230,000 | $500,000 | $108,000 | $400,000 |
| 2 | 77,500 | 220,000 | 279,275 | 900,000 | 230,000 | 500,000 | 108,000 | 400,000 |
| 3 | 78,000 | 220,000 | 279,550 | 900,000 | 230,000 | 500,000 | 108,000 | 400,000 |
| 4 | 78,500 | 220,000 | 279,825 | 900,000 | 230,000 | 500,000 | 108,000 | 400,000 |
| 5 | 79,000 | 220,000 | 280,100 | 900,000 | 230,000 | 500,000 | 108,000 | 400,000 |
| Total | $390,000 | $1,100,000 | $1,397,750 | $4,500,000 | $1,150,000 | $2,500,000 | $540,000 | $2,000,000 |
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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
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 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.
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 | 2 years3 years3 years 5 months3 years 7 monthsunable to determine |
| Proposal Tango | 2 years3 years2 years 11 months2 years 1 monthunable to determine |
| Proposal Uniform | 2 years3 years3 years 7 months3 years 5 monthsunable to determine |
| Proposal Victor | 2 years3 years2 years 5 months2 years 7 monthsunable to determine |
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. Round to one decimal place.
| Average Rate of Return | |
| Proposal Sierra | fill in the blank 5 % |
| Proposal Tango | fill in the blank 6 % |
| Proposal Uniform | fill in the blank 7 % |
| Proposal Victor | fill in the blank 8 % |
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 | Accept for further analysisReject |
| Proposal Tango | Accept for further analysisReject |
| Proposal Uniform | Accept for further analysisReject |
| Proposal Victor | Accept for further analysisReject |
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. If required, use the minus sign to indicate a subtraction or negative net present value.
| Select the proposal accepted for further analysis. | Proposal SierraProposal Tango | Proposal UniformProposal Victor |
| Present value of net cash flow total | $fill in the blank 15 | $fill in the blank 16 |
| Amount to be invested | fill in the blank 17 | fill in the blank 18 |
| Net present value | $fill in the blank 19 | $fill in the blank 20 |
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 SierraProposal Tango | Proposal UniformProposal Victor |
| Present value index (rounded) | fill in the blank 23 | fill in the blank 24 |
6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4).
| Rank 1st | Proposal SierraProposal TangoProposal UniformProposal Victor |
| Rank 2nd | Proposal SierraProposal TangoProposal UniformProposal Victor |
7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5).
| Rank 1st | Proposal SierraProposal TangoProposal UniformProposal Victor |
| Rank 2nd | Proposal SierraProposal TangoProposal UniformProposal Victor |
8. Based on your calculations above, complete the statements below.
- Looking at the present value computations,
Proposal SierraProposal TangoProposal UniformProposal Victor
has the larger net present value.Proposal SierraProposal TangoProposal UniformProposal Victor
is attractive in terms of amount of present value per dollar invested. Comparing the two proposals, their present value indiceshave a significant difference (.20 or more)have a moderate rangeare barely different (.08 or less)
. Lastly,Proposal SierraProposal TangoProposal UniformProposal Victor
has the larger initial investment. Considering all this information, Kopecky should proceed withProposal SierraProposal TangoProposal UniformProposal Victor
.
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Intermediate Accounting
Authors: J. David Spiceland, James Sepe, Mark Nelson, Wayne Thomas
10th edition
978-1260481952
