**Price: $5.99**

Empire 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: | 420,000 | 1 | 86,000 | 170,000 |

2 | 46,000 | 130,000 | ||

3 | 16,000 | 100,000 | ||

4 | (4,000) | 80,000 | ||

5 | (4,000) | 80,000 | ||

140,000 | 560,000 | |||

Proposal B: | 850,000 | 1 | 130,000 | 300,000 |

2 | 130,000 | 300,000 | ||

3 | 130,000 | 300,000 | ||

4 | 130,000 | 300,000 | ||

5 | 80,000 | 250,000 | ||

600,000 | 1,450,000 | |||

Proposal C: | 250,000 | 1 | 20,000 | 70,000 |

2 | 20,000 | 70,000 | ||

3 | 20,000 | 70,000 | ||

4 | (10,000) | 40,000 | ||

5 | (10,000) | 40,000 | ||

40,000 | 290,000 | |||

Proposal D: | 180,000 | 1 | 54,000 | 90,000 |

2 | 24,000 | 60,000 | ||

3 | 24,000 | 60,000 | ||

4 | 14,000 | 50,000 | ||

5 | 14,000 | 50,000 | ||

130,000 | 310,000 |

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.

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 (1)

and (2). By placing the calculated amounts in the first two columns on the left and by

placing a check mark in the appropriate column to the right, indicate which proposals

should be accepted for further analysis and which should be rejected.

Cash Payback Average Rate Accept for

Proposal Period of Return Further Analysis 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 appearing in this chapter.

Round to the nearest dollar.

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).

## No comments:

## Post a Comment