of three years. In addition, a minimum average rate of return of 12% is required on all The company's capital rationing policy requires a maximum cash payback period 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. Compute the cash payback period for each of the four proposals. 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. 3. Using the following format, summarize the results of your computations in parts and by placing a check mark in the appropriate column to the right, indicate which (1and (2). By placing the calculated amounts in the first two columns on the dete proposals should be accepted for further analysis and which should be rejected." Cash Payback Period Average Rate of Return Accept for Further Analysis Reject Proposal B 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 appearing in this chapter (Exhibit 2). 5. Compute the present value index for each of the proposals in part (4). Round to two decimal places. 6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4). 7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5). 8. Based on the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7). Net Present Value and Present Value Index Present Value of $1 at 12% Net Cash Flow Present Value of Net Cash Flow Year 1 Year 2 Year 3 Year 4 Year 5 Total Amount to be invested Net present value Present value index Present Value of $1 at 12% Net Cash Flow Present Value of Net Cash Flow Year 1 Year 2 Year 3 Year 4 Year 5 Total Amount to be invested Not prosent value Prosent value index B C D Payback Period Proposal A: -year, -month cash payback period Net Cash Flow Cumulative Net Cash Flows Year and Months Year 1 Year 2 Year 3 Year 4 Proposal B: -year, -month cash payback period Net Cash Cumulative Net Cash Flows Year and Months Flow Year 1 Year 2 Year 3 Year 4 Proposal C: -year, -month cash payback period Net Cash Flow Cumulative Net Cash Flows Year and Months Year 1 Year 2 Year 3 Year 4 Proposal D: -year, -month cash payback period Net Cash Flow Cumulative Net Cash Flows Year and Months A Pr. 26-6A PR 26-6A Capital rationing decision for a service company involving four proposals OBJ. 2, 3,5 3 Clearcast Communications Inc. is considering allocating a limited amount of capital invest- ment funds among four proposals. The amount of proposed investment, estimated income from operations, and net cash flow for each proposal are as follows: Proposal A: Investment $450,000 Year 1 2 3 4 5 Proposal B: $200,000 2 3 4 Income from Operations $ 30,000 30,000 20,000 10,000 (30,000) $ 60,000 $ 60,000 40,000 20,000 (10,000) (20,000) $ 90,000 $ 36,000 26,000 26,000 16,000 16,000 $120,000 $ 92,000 72,000 52,000 12,000 (8,000) $220,000 Net Cash Flow $120,000 120,000 110,000 100,000 60,000 $510,000 $100,000 80,000 60,000 30,000 20,000 $290,000 $100,000 90,000 90,000 80,000 80,000 $440,000 $200,000 180,000 160,000 120,000 100,000 $760,000 Proposal C: $320,000 1 u w N- 2 3 4 Proposal D: $540,000 1 2 CS3 4 5 A B D Proposal D: -year, -month cash payback period Net Cash Flow Cumulative Net Cash Flows Year and Months Year 1 Year 2 Year 3 Year 4 Average Rate of Return Proposal A: Proposal B: Proposal C Proposal D 2. Average Rate of Return Proposal A: 59 DU 31 32 3 -4 5 6 7 8 9 Proposal B: D Proposal C: Proposal D 3 Accept for Cash Payback Period Years Months Average Rate of Return Further Analysis? Proposal B D 28 29 6., 7. 30 Based on net present value calculated in Part 4, the proposals should be ranked as follows: 31 32 Rank 1 Rank 2 Based on present value index calculated in Part 5, the proposals should be ranked as follows: 33 34 35 36 37 38 39 10 31 2 Rank 1 Rank 2 8. 3 -4 5 [Key essay answer hero] 6 7 9