Question

Capital Rationing Decision for a Service Company Involving Four Proposals

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

Required:

1. Compute the cash payback period for each of the four proposals.

	Cash Payback Period
Proposal A
Proposal B
Proposal C
Proposal D

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. If required, round your answers to one decimal place.

	Average Rate of Return
Proposal A	%
Proposal B	%
Proposal C	%
Proposal D	%

3. Using the following format, summarize the results of your computations in parts (1) and (2) by placing the calculated amounts in the first two columns on the left and indicate which proposals should be accepted for further analysis and which should be rejected. If required, round your answers to one decimal place.

Proposal	Cash Payback Period	Average Rate of Return		Accept or Reject
A		%
B		%
C		%
D		%

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.

Select the proposal accepted for further analysis.
Present value of net cash flow total	$	$
Less amount to be invested	$	$
Net present value	$	$

5. Compute the present value index for each of the proposals in part (4). If required, round your answers to two decimal places.

Select proposal to compute Present value index.
Present value index (rounded)

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
Rank 2nd

7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5).

Rank 1st
Rank 2nd

8. The present value indexes indicate that although Proposal   has the larger net present value, it is not as attractive as Proposal   in terms of the amount of present value per dollar invested. Proposal   requires the larger investment. Thus, management should use investment resources for Proposal   before investing in Proposal  , absent any other qualitative considerations that may impact the decision.

Answer 1

Casl pay back for each proposals Proposals Cash pay back period S years and 5 months years 2 year and 3months Year Het casi flors cas flo- 3 plus($680,000 200,000 200,000 200,000 $160,000 $160,000 200,000600,000)'160,000: 3.5 years $400,000 $600,000 $760,000 320,000 $680,000 Het casi flors cas flo- $30,000 $30,000 $70,000 $70,000 20,000 320,000 200,000 4years $180,000 250,000 $320,000 340,000 Year Het casi flors cas flo- $55,000 53,000 50,000 $47,000 $45,000 $108,000 $55,0002year $108,000 $158,000 205,000 250,000 Het casi flors cas flo-

$180,000 $180,000 $160,000 $100,000 80,000 180,000 3months 360,000 $520,000 $620,000 $700,000 $400,000 2)ATerage rate of retern for each proposals Proposals A :(4240,0005)680,000 0)/2 B:(20,0005)(320,000+0)/2 C:($14200015) 't108,000+0)1'2 메$300,000/5)、(400,000+0/2 3) Sarising the reselts Prop Arerage rate of retarn 14.12% 2.50% 52.53% Cach pay back period 9 rate of r ACcep 4.12% 2.50% 52.53% 30% yars and 5 months ycars and 3months

) Het present Tae Select the propoal accepted for further analysis Proposal C Proposal D below) $170,067 $434,320 Less amount to be invested NPV Note $108,000 $400,000 62,067 $34,320 @15% Discounted cah flow 47,850 $40,068 $32,300 26,884 22,365 $170,067 Cash flows $55,000 $53,000 $50,000 47,000 $40,000 0.87 0.756 0.658 0.572 0.43 NPV Note 2 @15% Discounted cah flow $156,600 $136,080 105,280 57,200 $33,760 $434.720 Cash flows $180,000 $180,000 $160,000 $100,000 $80,000 0.87 0.756 0.658 0.572 0.497 NPV

5) Presest valse Inder Proposals C Pv index Proposal D Pv Index: 434,3201400,000: 1.24 170,067/5180,000: 1.51 6 Ranking the proposal-HPY Proposals Proposal D Proposal d ')Ranking thepo basedon Proposa Proposal d Proposal D 8) The present Tal.e·del-dicates that althoug. Proposal D Las larger Net Present ral·its י"ot attractire as proposal C interms of ao"t of Present valse per dollar i"ested. Proposal D requires larger inestmeat.Thus. anagement shoald invest resources for proposal C before investing in proposal D,absent any other qualitative considerations that may impact the decision. Rank 34,320 62,067 24.

Answer 2

Fried Chicken

Answer 3

Hitler did nothing wrong