Question
Renaissance Capital Group is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated income from operations,
Renaissance Capital Group 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: | $680,000 | 1 | $ 64,000 | $ 200,000 | ||
2 | 64,000 | 200,000 | ||||
3 | 64,000 | 200,000 | ||||
4 | 24,000 | 160,000 | ||||
5 | 24,000 | 160,000 | ||||
$240,000 | $ 920,000 | |||||
Proposal B: | $320,000 | 1 | $ 26,000 | $ 90,000 | ||
2 | 26,000 | 90,000 | ||||
3 | 6,000 | 70,000 | ||||
4 | 6,000 | 70,000 | ||||
5 | (44,000) | 20,000 | ||||
$ 20,000 | $340,000 | |||||
Proposal C: | $108,000 | 1 | $ 33,400 | $ 55,000 | ||
2 | 31,400 | 53,000 | ||||
3 | 28,400 | 50,000 | ||||
4 | 25,400 | 47,000 | ||||
5 | 23,400 | 45,000 | ||||
$142,000 | $ 250,000 | |||||
Proposal D: | $400,000 | 1 | $100,000 | $ 180,000 | ||
2 | 100,000 | 180,000 | ||||
3 | 80,000 | 160,000 | ||||
4 | 20,000 | 100,000 | ||||
5 | 0 | 80,000 | ||||
$300,000 | $700,000 |
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 4. For the proposals accepted for further analysis in part (3), compute the net present value. Use a rate of 15% and the present value of $1 table above. Round to the nearest dollar.
5. Compute the present value index for each of the proposals in part (4). If required, round your answers to two decimal places.
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