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PR25-6A Renaissance

Price: $5.99


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 Operation Net Cash flow
 Proposal A:   720,000  1  76,000  220,000
   2  76,000  220,000
   3  76,000  220,000
   4  36,000  180,000
   5  36,000  180,000
   300,000  1,020,000
 
 Proposal B:   124,000  1  59,200  84,000
   2  15,200  40,000
   3  15,200  40,000
   4  5,200  30,000
   5  (4,800)  20,000
   90,000  214,000
 
 Proposal C:   300,000  1  20,000  80,000
   2  20,000  80,000
   3  20,000  80,000
   4  -    60,000
   5  -    60,000
   60,000  360,000
 
 Proposal D:   200,000  1  40,000  80,000
   2  40,000  80,000
   3  20,000  60,000
   4  20,000  60,000
   5  20,000  60,000
   140,000  340,000


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.

Required:
1. Compute the cash payback period for each of the four proposals.
Cash Payback Period

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.

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 and indicating which proposals should be accepted for further analysis and which should be rejected.
Proposal Cash Payback Period Average Rate of Return Accept for Further Analysis Reject

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 in 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.

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 upon the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7).

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