![Bundle: Survey of Accounting, Loose-Leaf Version, 8th + CengageNOWv2, 1 term Printed Access Card](https://www.bartleby.com/isbn_cover_images/9781337379885/9781337379885_largeCoverImage.gif)
Capital rationing decision involving four proposals
Kopecky Industries Inc. 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:
The company’s capital rationing policy requires a maximum cash payback period of three years. In addition, a minimum average
Instructions
Compute the present value index for each oldie proposals in part (4). Round to two decimal places.
![Check Mark](/static/check-mark.png)
Want to see the full answer?
Check out a sample textbook solution![Blurred answer](/static/blurred-answer.jpg)
Chapter 15 Solutions
Bundle: Survey of Accounting, Loose-Leaf Version, 8th + CengageNOWv2, 1 term Printed Access Card
- Clearcast Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated operating income, and net cash flow for each proposal are as follows: The companys 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 computed 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. 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 table appearing in Exhibit 2 of this chapter. 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).arrow_forwardCash payback period for a service company Janes Clothing Inc. is evaluating two capital investment proposals for a retail outlet, each requiring an investment of 975,000 and each with a seven-year life and expected total net cash flows of 1,050,000. Location 1 is expected to provide equal annual net cash flows of 150,000, and Location 2 is expected to have the following unequal annual net cash flows: Determine the cash payback period for both location proposals.arrow_forwardNet present value method, present value index, and analysis for a service company First United Bank Inc. is evaluating three capital investment projects by using the net present value method. Relevant data related to the projects are summarized as follows: Instructions 1. Assuming that the desired rate of return is 15%, prepare a net present value analysis for each project. Use the present value table appearing in Exhibit 2 of this chapter. 2. Determine a present value index for each project. (Round to two decimal places.) 3. Which project offers the largest amount of present value per dollar of investment? Explain.arrow_forward
- Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?arrow_forwardb) Following data relate to five independent investment projects : Initial Outlay Projects P ORST 1,000,000 240,000 184,000 11,500 80,000 Annual Cash Inflows Life in Years 250,000 24,000 30,000 4,000 12,000 8 15 20 5 10 Page 2 of 3 Assume a 10% required rate of return and a 50% tax rate. Rank these five investment projects according to each of the following criteria: (i) Pay-back Period. (ii) Accounting Rate of Return. (iii) Net Present Value Index. (iv) Internal Rate of Return.arrow_forwardLee Enterprises accepts capital investment projects with a payback period of five years or less. Under this condition, which of the following projects would be acceptable? Project #1 Project #2 Annual cash flows $ 25,000 $ 40,000 Initial investment 125,000 160,000 A. Project #1 only. B. Project #2 only. C. Both Project #1 and Project #2. D. Neither Project #1 nor Project #2.arrow_forward
- Required: i.Determine the initial capital of Project A and Project B. If Project A and Project B are mutually exclusive, calculate the Net Present Value (NPV) of Project A and Project B given that the cost of capital is 5%.Based on the NPV method, explain with reason which project should be invested. ii. Axis Sdn. Bhd.’s current investment policy is to accept only investments that are recoverable within 3 years.Calculate the discounted payback period of Project A and Project B if the cost of capital is5%. Based on the calculated discounted payback period of Project A and Project B, advise the company on which new project to select if they are mutually exclusive.arrow_forwardSimple Investment Allocation Case: This year, 2022 ABM Company selected your team to manage their allotted budget amounting to 10 million pesos for investment diversification portfolio. Your team was assigned to handle the said account. What would you choose? Other investment assets or Alternatives to fixed income and equitiesarrow_forwardNote: Question 12, 13, 14 and 15 are based on the same two projects A and B. Your firm has estimated the following cash flows for two mutually exclusive capital investment projects. Firm uses 4.9 years as the cutoff for the discounted payback period. The firm's required rate of return is 11%. What is the discounted payback period of project A? Project A Cash Flow Year Project B Cash Flow -$80,000 -$180,000 1 $23,000 $53,000 2 $23,000 $53,000 3 $23,000 $47,000 4 $20,000 $47,000 5 $20,000 $40,000 6 $20,000 $27,000 5.90 5.26 5.01 O 4.61 4.89arrow_forward
- Analyze Capital Projects and Provide Recommendations Randolph Inc. is considering the following three capital project proposals. Proposal A Proposal B Proposal C. Initial investment $ 350,000 $280,000 $140, 000 Annual net cash flows $105,000 $88, 200 $56, 000 Disinvestment $0 $0 $0 Life 5 years 4 years 3 years The company initially screens projects considering (1) a payback period of 2.5 years or less and (2) a positive net present value using a discount rate of 10% b. Compute the net present value for each proposal and determine whether each proposal passes the initially screening based on your results. Note: Round your answer to the nearest dollar. Proposal A Proposal B Proposal C Net present value of all cash flows Answer Answer Answer Accept or Reject Answer Accept Answer Reject Answer Rejectarrow_forwardUsing capital rationing to make capital investment decisions Mountain Manufacturing is considering the following capital investment proposals. Mountains requirement criteria include a maximum payback period of five years and a required rate of return of 12.5%. Determine if each investment is acceptable or should be rejected (ignore qualitative factors). Rank the acceptable investments in order from most desirable to least desirable.arrow_forwardInformation on four investment proposals is given below: Investment required Present value of cash inflows Net present value Life of the project Required: 1. Compute the profitability index for each investment proposal. Note: Round your answers to 2 decimal places. 2. Rank the proposals in terms of preference. Investment Profitability Proposal Index A B с D $ (150,000) 211,500 $ 61,500 Rank Preference 5 years Investment Proposal 6 $ (200,000) 275,600 $ 75,600 7 years $ (180,000) 274,100 $ 94,100 6 years D $ (2,600,000) 3,470,500 $ 870,500 6 yearsarrow_forward
- Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
![Text book image](https://www.bartleby.com/isbn_cover_images/9781305961883/9781305961883_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337912020/9781337912020_smallCoverImage.jpg)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337902663/9781337902663_smallCoverImage.jpg)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337395083/9781337395083_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)