Capital rationing decision for a service company involving four proposals Clearcast Communications 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 yean. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are mil, 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 formal, summarize the results of your computations in parts (l) 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 he accepted for further analysis and which should be rejected. 4. For the proposals accepted for further analysts in part (3), compute the net present value. Use a rate of 12% and the present value of $1 table appearing in this chapter (Exhibit 2). 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).

Question

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Answer 1

Textbook Question

Chapter 25, Problem 25.6BPR

Capital rationing decision for a service company involving four proposals

Clearcast Communications 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:

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example 1

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example 2

The company’s capital rationing policy requires a maximum cash payback period of three yean. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are mil, 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 formal, summarize the results of your computations in parts (l) 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 he accepted for further analysis and which should be rejected.

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example 3

4. For the proposals accepted for further analysts in part (3), compute the net present value. Use a rate of 12% and the present value of $1 table appearing in this chapter (Exhibit 2).
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).

1.

Expert Solution

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

Average rate of return method:

Average rate of return is the amount of income which is earned over the life of the investment. It is used to measure the average income as a percent of the average investment of the business, and it is also known as the accounting rate of return.

The average rate of return is computed as follows:

$Average rate of return =Estimated average annual incomeAverage investment$

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Present value index:

Present value index is a technique, which isused to rank the proposals of the business. It is used by the management when the business has more investment proposals, and limited fund.

The present value index is computed as follows:

$Present value index =Total present value of net cash flowAmount to be invested$

The cash payback period for the given proposals.

Explanation of Solution

The cash payback period for the given proposals is as follows:

Proposal A:

Initial investment=$450,000

Cash payback period of Proposal A

Year	Net cash flows	Cumulative net cash flows
1	120,000	120,000
2	120,000	240,000
3	110,000	350,000
4	100,000	450,000

Table (1)

Hence, the cash payback period of proposal A is 4 years.

Proposal B:

Initial investment=$200,000

Cash payback period of Proposal B

Year	Net cash flows	Cumulative net cash flows
1	100,000	100,000
2	80,000	180,000
4 months(1)	20,000	200,000

Table (2)

Hence, the cash payback period of proposal B is 2 years and 4 months.

Working note:

1. Calculate the no. of months in the cash payback period:

$No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$20,000$60,000×12 months= 4 months$ (1)

Proposal C:

Initial investment=$320,000

Cash payback period of Proposal C

Year	Net cash flows	Cumulative net cash flows
1	100,000	100,000
2	90,000	190,000
3	90,000	280,000
6 months (2)	40,000	320,000

Table (3)

Hence, the cash payback period of proposal C is 3 years and 6 months.

Working note:

2. Calculate the no. of months in the cash payback period:

$No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$40,000$80,000×12 months= 6 months$ (2)

Proposal D:

Initial investment=$540,000

Cash payback period of Proposal D

Year	Net cash flows	Cumulative net cash flows
1	200,000	200,000
2	180,000	380,000
3	160,000	540,000

Table (4)

Hence, the cash payback period of proposal D is 3 years.

2.

Expert Solution

To determine

The average rate of return for the give proposals.

Explanation of Solution

The average rate of return for the given proposals is as follows:

Proposal A:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($60,0005 years)($450,0002)=$12,000$225,000=0.053In percentage 0.053×100 = 5.3%$

Hence, the average rate of return for Proposal A is 5.3%.

Proposal B:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($90,0005 years)($200,0002)=$18,000$100,000=0.18In percentage 0.18×100 = 18.0%$

Hence, the average rate of return for Proposal B is 18.0%.

Proposal C:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($120,0005 years)($320,0002)=$24,000$160,000=0.15In percentage 0.15×100 = 15.0%$

Hence, the average rate of return for Proposal C is 15.0%.

Proposal D:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($220,0005 years)($540,0002)=$44,000$270,000=0.163In percentage 0.163×100 = 16.3%$

Hence, the average rate of return for Proposal D is 16.3%.

3.

Expert Solution

To determine

To indicate: The proposals which should be accepted for further analysis, and which should be rejected.

Explanation of Solution

The proposals which should be accepted for further analysis, and which should be rejected is as follows:

Financial & Managerial Accounting, Chapter 25, Problem 25.6BPR , additional homework tip 1

Figure (1)

Proposals A and C are rejected, because proposal A and C fails to meet the required maximum cash back period of 3 years, and they has less rate of return than the other proposals. Hence, Proposals B and D are preferable.

4.

Expert Solution

To determine

The net present value of preferred proposals.

Explanation of Solution

Calculate the net present value of the proposals which has 12% rate of return as follows:

Proposal B:

Financial & Managerial Accounting, Chapter 25, Problem 25.6BPR , additional homework tip 2

Figure (2)

Hence, the net present value of proposal B is $26,200.

Proposal D:

Figure (3)

Hence, the net present value of proposal D is $29,000.

5.

Expert Solution

To determine

To determine: The present value index for each proposal.

Explanation of Solution

The present value index for each proposal is as follows:

Proposal B:

Calculate the present value index for proposal B:

$Present value index for proposal B = Total presest value of cash flowAmount to be invested=$226,200$200,000=1.13$

Hence, the present value index for proposal B is 1.13.

Proposal D:

Calculate the present value index for proposal D:

$Present value index for proposal D= Total presest value of cash flowAmount to be invested=$569,000$540,000=1.05$

Hence, the present value index for proposal Dis 1.05.

6.

Expert Solution

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of net cash flows.

Explanation of Solution

Proposals are arranged by rank is as follows:

Proposals	Net present value	Rank
Proposal D	$ 29,000	1
Proposal B	$ 26,200	2

Table (5)

7.

Expert Solution

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of index.

Explanation of Solution

Proposals are arranged by rank is as follows:

Proposals	Present value index	Rank
Proposal B	1.13	1
Proposal D	1.05	2

Table (6)

8.

Expert Solution

To determine

To analysis: The proposal which is favor to investment, and comment on the relative

attractiveness of the proposals based on the rank.

Explanation of Solution

On the basis of net present value:

The net present value of Proposal B is $26,200, and Proposal D is $29,000. In this case, the net present value of proposal D is more than the net present value of proposal B. Hence, investment in Proposal D is preferable.

On the basis of present value index:

The present value index of Proposal B is 1.13, and the present value index of Proposal D is 1.05. In this case, Proposal B has the favorable present value index, because the present value index of Proposal B (1.13) is more than Proposal D (1.05). Thus, the investment in Proposal B is preferable (favorable).

Every business tries to getmaximum profit with minimum investment. Hence, the cost of investment in Proposal B is less than the proposal D. Thus, investment in Proposal B is preferable

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Answer 2

Textbook Question

Chapter 25, Problem 25.6BPR

Capital rationing decision for a service company involving four proposals

Clearcast Communications 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:

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example 1

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example 2

The company’s capital rationing policy requires a maximum cash payback period of three yean. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are mil, 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 formal, summarize the results of your computations in parts (l) 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 he accepted for further analysis and which should be rejected.

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example 3

4. For the proposals accepted for further analysts in part (3), compute the net present value. Use a rate of 12% and the present value of $1 table appearing in this chapter (Exhibit 2).
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).

1.

Expert Solution

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

Average rate of return method:

Average rate of return is the amount of income which is earned over the life of the investment. It is used to measure the average income as a percent of the average investment of the business, and it is also known as the accounting rate of return.

The average rate of return is computed as follows:

$Average rate of return =Estimated average annual incomeAverage investment$

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Present value index:

Present value index is a technique, which isused to rank the proposals of the business. It is used by the management when the business has more investment proposals, and limited fund.

The present value index is computed as follows:

$Present value index =Total present value of net cash flowAmount to be invested$

The cash payback period for the given proposals.

Explanation of Solution

The cash payback period for the given proposals is as follows:

Proposal A:

Initial investment=$450,000

Cash payback period of Proposal A

Year	Net cash flows	Cumulative net cash flows
1	120,000	120,000
2	120,000	240,000
3	110,000	350,000
4	100,000	450,000

Table (1)

Hence, the cash payback period of proposal A is 4 years.

Proposal B:

Initial investment=$200,000

Cash payback period of Proposal B

Year	Net cash flows	Cumulative net cash flows
1	100,000	100,000
2	80,000	180,000
4 months(1)	20,000	200,000

Table (2)

Hence, the cash payback period of proposal B is 2 years and 4 months.

Working note:

1. Calculate the no. of months in the cash payback period:

$No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$20,000$60,000×12 months= 4 months$ (1)

Proposal C:

Initial investment=$320,000

Cash payback period of Proposal C

Year	Net cash flows	Cumulative net cash flows
1	100,000	100,000
2	90,000	190,000
3	90,000	280,000
6 months (2)	40,000	320,000

Table (3)

Hence, the cash payback period of proposal C is 3 years and 6 months.

Working note:

2. Calculate the no. of months in the cash payback period:

$No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$40,000$80,000×12 months= 6 months$ (2)

Proposal D:

Initial investment=$540,000

Cash payback period of Proposal D

Year	Net cash flows	Cumulative net cash flows
1	200,000	200,000
2	180,000	380,000
3	160,000	540,000

Table (4)

Hence, the cash payback period of proposal D is 3 years.

2.

Expert Solution

To determine

The average rate of return for the give proposals.

Explanation of Solution

The average rate of return for the given proposals is as follows:

Proposal A:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($60,0005 years)($450,0002)=$12,000$225,000=0.053In percentage 0.053×100 = 5.3%$

Hence, the average rate of return for Proposal A is 5.3%.

Proposal B:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($90,0005 years)($200,0002)=$18,000$100,000=0.18In percentage 0.18×100 = 18.0%$

Hence, the average rate of return for Proposal B is 18.0%.

Proposal C:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($120,0005 years)($320,0002)=$24,000$160,000=0.15In percentage 0.15×100 = 15.0%$

Hence, the average rate of return for Proposal C is 15.0%.

Proposal D:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($220,0005 years)($540,0002)=$44,000$270,000=0.163In percentage 0.163×100 = 16.3%$

Hence, the average rate of return for Proposal D is 16.3%.

3.

Expert Solution

To determine

To indicate: The proposals which should be accepted for further analysis, and which should be rejected.

Explanation of Solution

The proposals which should be accepted for further analysis, and which should be rejected is as follows:

Financial & Managerial Accounting, Chapter 25, Problem 25.6BPR , additional homework tip 1

Figure (1)

Proposals A and C are rejected, because proposal A and C fails to meet the required maximum cash back period of 3 years, and they has less rate of return than the other proposals. Hence, Proposals B and D are preferable.

4.

Expert Solution

To determine

The net present value of preferred proposals.

Explanation of Solution

Calculate the net present value of the proposals which has 12% rate of return as follows:

Proposal B:

Financial & Managerial Accounting, Chapter 25, Problem 25.6BPR , additional homework tip 2

Figure (2)

Hence, the net present value of proposal B is $26,200.

Proposal D:

Figure (3)

Hence, the net present value of proposal D is $29,000.

5.

Expert Solution

To determine

To determine: The present value index for each proposal.

Explanation of Solution

The present value index for each proposal is as follows:

Proposal B:

Calculate the present value index for proposal B:

$Present value index for proposal B = Total presest value of cash flowAmount to be invested=$226,200$200,000=1.13$

Hence, the present value index for proposal B is 1.13.

Proposal D:

Calculate the present value index for proposal D:

$Present value index for proposal D= Total presest value of cash flowAmount to be invested=$569,000$540,000=1.05$

Hence, the present value index for proposal Dis 1.05.

6.

Expert Solution

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of net cash flows.

Explanation of Solution

Proposals are arranged by rank is as follows:

Proposals	Net present value	Rank
Proposal D	$ 29,000	1
Proposal B	$ 26,200	2

Table (5)

7.

Expert Solution

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of index.

Explanation of Solution

Proposals are arranged by rank is as follows:

Proposals	Present value index	Rank
Proposal B	1.13	1
Proposal D	1.05	2

Table (6)

8.

Expert Solution

To determine

To analysis: The proposal which is favor to investment, and comment on the relative

attractiveness of the proposals based on the rank.

Explanation of Solution

On the basis of net present value:

The net present value of Proposal B is $26,200, and Proposal D is $29,000. In this case, the net present value of proposal D is more than the net present value of proposal B. Hence, investment in Proposal D is preferable.

On the basis of present value index:

The present value index of Proposal B is 1.13, and the present value index of Proposal D is 1.05. In this case, Proposal B has the favorable present value index, because the present value index of Proposal B (1.13) is more than Proposal D (1.05). Thus, the investment in Proposal B is preferable (favorable).

Every business tries to getmaximum profit with minimum investment. Hence, the cost of investment in Proposal B is less than the proposal D. Thus, investment in Proposal B is preferable

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Answer 3

Textbook Question

Chapter 25, Problem 25.6BPR

Capital rationing decision for a service company involving four proposals

Clearcast Communications 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:

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example 1

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example 2

The company’s capital rationing policy requires a maximum cash payback period of three yean. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are mil, 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 formal, summarize the results of your computations in parts (l) 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 he accepted for further analysis and which should be rejected.

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example 3

4. For the proposals accepted for further analysts in part (3), compute the net present value. Use a rate of 12% and the present value of $1 table appearing in this chapter (Exhibit 2).
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).

1.

Expert Solution

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

Average rate of return method:

Average rate of return is the amount of income which is earned over the life of the investment. It is used to measure the average income as a percent of the average investment of the business, and it is also known as the accounting rate of return.

The average rate of return is computed as follows:

$Average rate of return =Estimated average annual incomeAverage investment$

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Present value index:

Present value index is a technique, which isused to rank the proposals of the business. It is used by the management when the business has more investment proposals, and limited fund.

The present value index is computed as follows:

$Present value index =Total present value of net cash flowAmount to be invested$

The cash payback period for the given proposals.

Explanation of Solution

The cash payback period for the given proposals is as follows:

Proposal A:

Initial investment=$450,000

Cash payback period of Proposal A

Year	Net cash flows	Cumulative net cash flows
1	120,000	120,000
2	120,000	240,000
3	110,000	350,000
4	100,000	450,000

Table (1)

Hence, the cash payback period of proposal A is 4 years.

Proposal B:

Initial investment=$200,000

Cash payback period of Proposal B

Year	Net cash flows	Cumulative net cash flows
1	100,000	100,000
2	80,000	180,000
4 months(1)	20,000	200,000

Table (2)

Hence, the cash payback period of proposal B is 2 years and 4 months.

Working note:

1. Calculate the no. of months in the cash payback period:

$No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$20,000$60,000×12 months= 4 months$ (1)

Proposal C:

Initial investment=$320,000

Cash payback period of Proposal C

Year	Net cash flows	Cumulative net cash flows
1	100,000	100,000
2	90,000	190,000
3	90,000	280,000
6 months (2)	40,000	320,000

Table (3)

Hence, the cash payback period of proposal C is 3 years and 6 months.

Working note:

2. Calculate the no. of months in the cash payback period:

$No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$40,000$80,000×12 months= 6 months$ (2)

Proposal D:

Initial investment=$540,000

Cash payback period of Proposal D

Year	Net cash flows	Cumulative net cash flows
1	200,000	200,000
2	180,000	380,000
3	160,000	540,000

Table (4)

Hence, the cash payback period of proposal D is 3 years.

2.

Expert Solution

To determine

The average rate of return for the give proposals.

Explanation of Solution

The average rate of return for the given proposals is as follows:

Proposal A:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($60,0005 years)($450,0002)=$12,000$225,000=0.053In percentage 0.053×100 = 5.3%$

Hence, the average rate of return for Proposal A is 5.3%.

Proposal B:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($90,0005 years)($200,0002)=$18,000$100,000=0.18In percentage 0.18×100 = 18.0%$

Hence, the average rate of return for Proposal B is 18.0%.

Proposal C:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($120,0005 years)($320,0002)=$24,000$160,000=0.15In percentage 0.15×100 = 15.0%$

Hence, the average rate of return for Proposal C is 15.0%.

Proposal D:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($220,0005 years)($540,0002)=$44,000$270,000=0.163In percentage 0.163×100 = 16.3%$

Hence, the average rate of return for Proposal D is 16.3%.

3.

Expert Solution

To determine

To indicate: The proposals which should be accepted for further analysis, and which should be rejected.

Explanation of Solution

The proposals which should be accepted for further analysis, and which should be rejected is as follows:

Financial & Managerial Accounting, Chapter 25, Problem 25.6BPR , additional homework tip 1

Figure (1)

Proposals A and C are rejected, because proposal A and C fails to meet the required maximum cash back period of 3 years, and they has less rate of return than the other proposals. Hence, Proposals B and D are preferable.

4.

Expert Solution

To determine

The net present value of preferred proposals.

Explanation of Solution

Calculate the net present value of the proposals which has 12% rate of return as follows:

Proposal B:

Financial & Managerial Accounting, Chapter 25, Problem 25.6BPR , additional homework tip 2

Figure (2)

Hence, the net present value of proposal B is $26,200.

Proposal D:

Figure (3)

Hence, the net present value of proposal D is $29,000.

5.

Expert Solution

To determine

To determine: The present value index for each proposal.

Explanation of Solution

The present value index for each proposal is as follows:

Proposal B:

Calculate the present value index for proposal B:

$Present value index for proposal B = Total presest value of cash flowAmount to be invested=$226,200$200,000=1.13$

Hence, the present value index for proposal B is 1.13.

Proposal D:

Calculate the present value index for proposal D:

$Present value index for proposal D= Total presest value of cash flowAmount to be invested=$569,000$540,000=1.05$

Hence, the present value index for proposal Dis 1.05.

6.

Expert Solution

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of net cash flows.

Explanation of Solution

Proposals are arranged by rank is as follows:

Proposals	Net present value	Rank
Proposal D	$ 29,000	1
Proposal B	$ 26,200	2

Table (5)

7.

Expert Solution

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of index.

Explanation of Solution

Proposals are arranged by rank is as follows:

Proposals	Present value index	Rank
Proposal B	1.13	1
Proposal D	1.05	2

Table (6)

8.

Expert Solution

To determine

To analysis: The proposal which is favor to investment, and comment on the relative

attractiveness of the proposals based on the rank.

Explanation of Solution

On the basis of net present value:

The net present value of Proposal B is $26,200, and Proposal D is $29,000. In this case, the net present value of proposal D is more than the net present value of proposal B. Hence, investment in Proposal D is preferable.

On the basis of present value index:

The present value index of Proposal B is 1.13, and the present value index of Proposal D is 1.05. In this case, Proposal B has the favorable present value index, because the present value index of Proposal B (1.13) is more than Proposal D (1.05). Thus, the investment in Proposal B is preferable (favorable).

Every business tries to getmaximum profit with minimum investment. Hence, the cost of investment in Proposal B is less than the proposal D. Thus, investment in Proposal B is preferable

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Answer 4

Textbook Question

Chapter 25, Problem 25.6BPR

Capital rationing decision for a service company involving four proposals

Clearcast Communications 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:

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example 1

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example 2

The company’s capital rationing policy requires a maximum cash payback period of three yean. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are mil, 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 formal, summarize the results of your computations in parts (l) 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 he accepted for further analysis and which should be rejected.

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example 3

4. For the proposals accepted for further analysts in part (3), compute the net present value. Use a rate of 12% and the present value of $1 table appearing in this chapter (Exhibit 2).
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).

1.

Expert Solution

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

Average rate of return method:

Average rate of return is the amount of income which is earned over the life of the investment. It is used to measure the average income as a percent of the average investment of the business, and it is also known as the accounting rate of return.

The average rate of return is computed as follows:

$Average rate of return =Estimated average annual incomeAverage investment$

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Present value index:

Present value index is a technique, which isused to rank the proposals of the business. It is used by the management when the business has more investment proposals, and limited fund.

The present value index is computed as follows:

$Present value index =Total present value of net cash flowAmount to be invested$

The cash payback period for the given proposals.

Explanation of Solution

The cash payback period for the given proposals is as follows:

Proposal A:

Initial investment=$450,000

Cash payback period of Proposal A

Year	Net cash flows	Cumulative net cash flows
1	120,000	120,000
2	120,000	240,000
3	110,000	350,000
4	100,000	450,000

Table (1)

Hence, the cash payback period of proposal A is 4 years.

Proposal B:

Initial investment=$200,000

Cash payback period of Proposal B

Year	Net cash flows	Cumulative net cash flows
1	100,000	100,000
2	80,000	180,000
4 months(1)	20,000	200,000

Table (2)

Hence, the cash payback period of proposal B is 2 years and 4 months.

Working note:

1. Calculate the no. of months in the cash payback period:

$No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$20,000$60,000×12 months= 4 months$ (1)

Proposal C:

Initial investment=$320,000

Cash payback period of Proposal C

Year	Net cash flows	Cumulative net cash flows
1	100,000	100,000
2	90,000	190,000
3	90,000	280,000
6 months (2)	40,000	320,000

Table (3)

Hence, the cash payback period of proposal C is 3 years and 6 months.

Working note:

2. Calculate the no. of months in the cash payback period:

$No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$40,000$80,000×12 months= 6 months$ (2)

Proposal D:

Initial investment=$540,000

Cash payback period of Proposal D

Year	Net cash flows	Cumulative net cash flows
1	200,000	200,000
2	180,000	380,000
3	160,000	540,000

Table (4)

Hence, the cash payback period of proposal D is 3 years.

2.

Expert Solution

To determine

The average rate of return for the give proposals.

Explanation of Solution

The average rate of return for the given proposals is as follows:

Proposal A:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($60,0005 years)($450,0002)=$12,000$225,000=0.053In percentage 0.053×100 = 5.3%$

Hence, the average rate of return for Proposal A is 5.3%.

Proposal B:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($90,0005 years)($200,0002)=$18,000$100,000=0.18In percentage 0.18×100 = 18.0%$

Hence, the average rate of return for Proposal B is 18.0%.

Proposal C:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($120,0005 years)($320,0002)=$24,000$160,000=0.15In percentage 0.15×100 = 15.0%$

Hence, the average rate of return for Proposal C is 15.0%.

Proposal D:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($220,0005 years)($540,0002)=$44,000$270,000=0.163In percentage 0.163×100 = 16.3%$

Hence, the average rate of return for Proposal D is 16.3%.

3.

Expert Solution

To determine

To indicate: The proposals which should be accepted for further analysis, and which should be rejected.

Explanation of Solution

The proposals which should be accepted for further analysis, and which should be rejected is as follows:

Financial & Managerial Accounting, Chapter 25, Problem 25.6BPR , additional homework tip 1

Figure (1)

Proposals A and C are rejected, because proposal A and C fails to meet the required maximum cash back period of 3 years, and they has less rate of return than the other proposals. Hence, Proposals B and D are preferable.

4.

Expert Solution

To determine

The net present value of preferred proposals.

Explanation of Solution

Calculate the net present value of the proposals which has 12% rate of return as follows:

Proposal B:

Financial & Managerial Accounting, Chapter 25, Problem 25.6BPR , additional homework tip 2

Figure (2)

Hence, the net present value of proposal B is $26,200.

Proposal D:

Figure (3)

Hence, the net present value of proposal D is $29,000.

5.

Expert Solution

To determine

To determine: The present value index for each proposal.

Explanation of Solution

The present value index for each proposal is as follows:

Proposal B:

Calculate the present value index for proposal B:

$Present value index for proposal B = Total presest value of cash flowAmount to be invested=$226,200$200,000=1.13$

Hence, the present value index for proposal B is 1.13.

Proposal D:

Calculate the present value index for proposal D:

$Present value index for proposal D= Total presest value of cash flowAmount to be invested=$569,000$540,000=1.05$

Hence, the present value index for proposal Dis 1.05.

6.

Expert Solution

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of net cash flows.

Explanation of Solution

Proposals are arranged by rank is as follows:

Proposals	Net present value	Rank
Proposal D	$ 29,000	1
Proposal B	$ 26,200	2

Table (5)

7.

Expert Solution

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of index.

Explanation of Solution

Proposals are arranged by rank is as follows:

Proposals	Present value index	Rank
Proposal B	1.13	1
Proposal D	1.05	2

Table (6)

8.

Expert Solution

To determine

To analysis: The proposal which is favor to investment, and comment on the relative

attractiveness of the proposals based on the rank.

Explanation of Solution

On the basis of net present value:

The net present value of Proposal B is $26,200, and Proposal D is $29,000. In this case, the net present value of proposal D is more than the net present value of proposal B. Hence, investment in Proposal D is preferable.

On the basis of present value index:

The present value index of Proposal B is 1.13, and the present value index of Proposal D is 1.05. In this case, Proposal B has the favorable present value index, because the present value index of Proposal B (1.13) is more than Proposal D (1.05). Thus, the investment in Proposal B is preferable (favorable).

Every business tries to getmaximum profit with minimum investment. Hence, the cost of investment in Proposal B is less than the proposal D. Thus, investment in Proposal B is preferable

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

1.

Expert Solution

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

Average rate of return method:

Average rate of return is the amount of income which is earned over the life of the investment. It is used to measure the average income as a percent of the average investment of the business, and it is also known as the accounting rate of return.

The average rate of return is computed as follows:

$Average rate of return =Estimated average annual incomeAverage investment$

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Present value index:

Present value index is a technique, which isused to rank the proposals of the business. It is used by the management when the business has more investment proposals, and limited fund.

The present value index is computed as follows:

$Present value index =Total present value of net cash flowAmount to be invested$

The cash payback period for the given proposals.

Explanation of Solution

The cash payback period for the given proposals is as follows:

Proposal A:

Initial investment=$450,000

Cash payback period of Proposal A

Year	Net cash flows	Cumulative net cash flows
1	120,000	120,000
2	120,000	240,000
3	110,000	350,000
4	100,000	450,000

Table (1)

Hence, the cash payback period of proposal A is 4 years.

Proposal B:

Initial investment=$200,000

Cash payback period of Proposal B

Year	Net cash flows	Cumulative net cash flows
1	100,000	100,000
2	80,000	180,000
4 months(1)	20,000	200,000

Table (2)

Hence, the cash payback period of proposal B is 2 years and 4 months.

Working note:

1. Calculate the no. of months in the cash payback period:

$No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$20,000$60,000×12 months= 4 months$ (1)

Proposal C:

Initial investment=$320,000

Cash payback period of Proposal C

Year	Net cash flows	Cumulative net cash flows
1	100,000	100,000
2	90,000	190,000
3	90,000	280,000
6 months (2)	40,000	320,000

Table (3)

Hence, the cash payback period of proposal C is 3 years and 6 months.

Working note:

2. Calculate the no. of months in the cash payback period:

$No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$40,000$80,000×12 months= 6 months$ (2)

Proposal D:

Initial investment=$540,000

Cash payback period of Proposal D

Year	Net cash flows	Cumulative net cash flows
1	200,000	200,000
2	180,000	380,000
3	160,000	540,000

Table (4)

Hence, the cash payback period of proposal D is 3 years.

2.

Expert Solution

To determine

The average rate of return for the give proposals.

Explanation of Solution

The average rate of return for the given proposals is as follows:

Proposal A:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($60,0005 years)($450,0002)=$12,000$225,000=0.053In percentage 0.053×100 = 5.3%$

Hence, the average rate of return for Proposal A is 5.3%.

Proposal B:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($90,0005 years)($200,0002)=$18,000$100,000=0.18In percentage 0.18×100 = 18.0%$

Hence, the average rate of return for Proposal B is 18.0%.

Proposal C:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($120,0005 years)($320,0002)=$24,000$160,000=0.15In percentage 0.15×100 = 15.0%$

Hence, the average rate of return for Proposal C is 15.0%.

Proposal D:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($220,0005 years)($540,0002)=$44,000$270,000=0.163In percentage 0.163×100 = 16.3%$

Hence, the average rate of return for Proposal D is 16.3%.

3.

Expert Solution

To determine

To indicate: The proposals which should be accepted for further analysis, and which should be rejected.

Explanation of Solution

The proposals which should be accepted for further analysis, and which should be rejected is as follows:

Financial & Managerial Accounting, Chapter 25, Problem 25.6BPR , additional homework tip 1

Figure (1)

Proposals A and C are rejected, because proposal A and C fails to meet the required maximum cash back period of 3 years, and they has less rate of return than the other proposals. Hence, Proposals B and D are preferable.

4.

Expert Solution

To determine

The net present value of preferred proposals.

Explanation of Solution

Calculate the net present value of the proposals which has 12% rate of return as follows:

Proposal B:

Financial & Managerial Accounting, Chapter 25, Problem 25.6BPR , additional homework tip 2

Figure (2)

Hence, the net present value of proposal B is $26,200.

Proposal D:

Figure (3)

Hence, the net present value of proposal D is $29,000.

5.

Expert Solution

To determine

To determine: The present value index for each proposal.

Explanation of Solution

The present value index for each proposal is as follows:

Proposal B:

Calculate the present value index for proposal B:

$Present value index for proposal B = Total presest value of cash flowAmount to be invested=$226,200$200,000=1.13$

Hence, the present value index for proposal B is 1.13.

Proposal D:

Calculate the present value index for proposal D:

$Present value index for proposal D= Total presest value of cash flowAmount to be invested=$569,000$540,000=1.05$

Hence, the present value index for proposal Dis 1.05.

6.

Expert Solution

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of net cash flows.

Explanation of Solution

Proposals are arranged by rank is as follows:

Proposals	Net present value	Rank
Proposal D	$ 29,000	1
Proposal B	$ 26,200	2

Table (5)

7.

Expert Solution

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of index.

Explanation of Solution

Proposals are arranged by rank is as follows:

Proposals	Present value index	Rank
Proposal B	1.13	1
Proposal D	1.05	2

Table (6)

8.

Expert Solution

To determine

To analysis: The proposal which is favor to investment, and comment on the relative

attractiveness of the proposals based on the rank.

Explanation of Solution

On the basis of net present value:

The net present value of Proposal B is $26,200, and Proposal D is $29,000. In this case, the net present value of proposal D is more than the net present value of proposal B. Hence, investment in Proposal D is preferable.

On the basis of present value index:

The present value index of Proposal B is 1.13, and the present value index of Proposal D is 1.05. In this case, Proposal B has the favorable present value index, because the present value index of Proposal B (1.13) is more than Proposal D (1.05). Thus, the investment in Proposal B is preferable (favorable).

Every business tries to getmaximum profit with minimum investment. Hence, the cost of investment in Proposal B is less than the proposal D. Thus, investment in Proposal B is preferable

Answer 8

1.

Expert Solution

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

Average rate of return method:

Average rate of return is the amount of income which is earned over the life of the investment. It is used to measure the average income as a percent of the average investment of the business, and it is also known as the accounting rate of return.

The average rate of return is computed as follows:

$Average rate of return =Estimated average annual incomeAverage investment$

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Present value index:

Present value index is a technique, which isused to rank the proposals of the business. It is used by the management when the business has more investment proposals, and limited fund.

The present value index is computed as follows:

$Present value index =Total present value of net cash flowAmount to be invested$

The cash payback period for the given proposals.

Explanation of Solution

The cash payback period for the given proposals is as follows:

Proposal A:

Initial investment=$450,000

Cash payback period of Proposal A

Year	Net cash flows	Cumulative net cash flows
1	120,000	120,000
2	120,000	240,000
3	110,000	350,000
4	100,000	450,000

Table (1)

Hence, the cash payback period of proposal A is 4 years.

Proposal B:

Initial investment=$200,000

Cash payback period of Proposal B

Year	Net cash flows	Cumulative net cash flows
1	100,000	100,000
2	80,000	180,000
4 months(1)	20,000	200,000

Table (2)

Hence, the cash payback period of proposal B is 2 years and 4 months.

Working note:

1. Calculate the no. of months in the cash payback period:

$No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$20,000$60,000×12 months= 4 months$ (1)

Proposal C:

Initial investment=$320,000

Cash payback period of Proposal C

Year	Net cash flows	Cumulative net cash flows
1	100,000	100,000
2	90,000	190,000
3	90,000	280,000
6 months (2)	40,000	320,000

Table (3)

Hence, the cash payback period of proposal C is 3 years and 6 months.

Working note:

2. Calculate the no. of months in the cash payback period:

$No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$40,000$80,000×12 months= 6 months$ (2)

Proposal D:

Initial investment=$540,000

Cash payback period of Proposal D

Year	Net cash flows	Cumulative net cash flows
1	200,000	200,000
2	180,000	380,000
3	160,000	540,000

Table (4)

Hence, the cash payback period of proposal D is 3 years.

Answer 9

1.

Expert Solution

Answer 10

1.

Expert Solution

Answer 11

Expert Solution

Answer 12

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

Average rate of return method:

Average rate of return is the amount of income which is earned over the life of the investment. It is used to measure the average income as a percent of the average investment of the business, and it is also known as the accounting rate of return.

The average rate of return is computed as follows:

$Average rate of return =Estimated average annual incomeAverage investment$

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Present value index:

Present value index is a technique, which isused to rank the proposals of the business. It is used by the management when the business has more investment proposals, and limited fund.

The present value index is computed as follows:

$Present value index =Total present value of net cash flowAmount to be invested$

The cash payback period for the given proposals.

Answer 13

Explanation of Solution

The cash payback period for the given proposals is as follows:

Proposal A:

Initial investment=$450,000

Cash payback period of Proposal A

Year	Net cash flows	Cumulative net cash flows
1	120,000	120,000
2	120,000	240,000
3	110,000	350,000
4	100,000	450,000

Table (1)

Hence, the cash payback period of proposal A is 4 years.

Proposal B:

Initial investment=$200,000

Cash payback period of Proposal B

Year	Net cash flows	Cumulative net cash flows
1	100,000	100,000
2	80,000	180,000
4 months(1)	20,000	200,000

Table (2)

Hence, the cash payback period of proposal B is 2 years and 4 months.

Working note:

1. Calculate the no. of months in the cash payback period:

$No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$20,000$60,000×12 months= 4 months$ (1)

Proposal C:

Initial investment=$320,000

Cash payback period of Proposal C

Year	Net cash flows	Cumulative net cash flows
1	100,000	100,000
2	90,000	190,000
3	90,000	280,000
6 months (2)	40,000	320,000

Table (3)

Hence, the cash payback period of proposal C is 3 years and 6 months.

Working note:

2. Calculate the no. of months in the cash payback period:

$No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$40,000$80,000×12 months= 6 months$ (2)

Proposal D:

Initial investment=$540,000

Cash payback period of Proposal D

Year	Net cash flows	Cumulative net cash flows
1	200,000	200,000
2	180,000	380,000
3	160,000	540,000

Table (4)

Hence, the cash payback period of proposal D is 3 years.

Answer 14

2.

Expert Solution

To determine

The average rate of return for the give proposals.

Explanation of Solution

The average rate of return for the given proposals is as follows:

Proposal A:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($60,0005 years)($450,0002)=$12,000$225,000=0.053In percentage 0.053×100 = 5.3%$

Hence, the average rate of return for Proposal A is 5.3%.

Proposal B:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($90,0005 years)($200,0002)=$18,000$100,000=0.18In percentage 0.18×100 = 18.0%$

Hence, the average rate of return for Proposal B is 18.0%.

Proposal C:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($120,0005 years)($320,0002)=$24,000$160,000=0.15In percentage 0.15×100 = 15.0%$

Hence, the average rate of return for Proposal C is 15.0%.

Proposal D:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($220,0005 years)($540,0002)=$44,000$270,000=0.163In percentage 0.163×100 = 16.3%$

Hence, the average rate of return for Proposal D is 16.3%.

Answer 15

2.

Expert Solution

Answer 16

2.

Expert Solution

Answer 17

Expert Solution

Answer 18

To determine

The average rate of return for the give proposals.

Answer 19

Explanation of Solution

The average rate of return for the given proposals is as follows:

Proposal A:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($60,0005 years)($450,0002)=$12,000$225,000=0.053In percentage 0.053×100 = 5.3%$

Hence, the average rate of return for Proposal A is 5.3%.

Proposal B:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($90,0005 years)($200,0002)=$18,000$100,000=0.18In percentage 0.18×100 = 18.0%$

Hence, the average rate of return for Proposal B is 18.0%.

Proposal C:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($120,0005 years)($320,0002)=$24,000$160,000=0.15In percentage 0.15×100 = 15.0%$

Hence, the average rate of return for Proposal C is 15.0%.

Proposal D:

$Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($220,0005 years)($540,0002)=$44,000$270,000=0.163In percentage 0.163×100 = 16.3%$

Hence, the average rate of return for Proposal D is 16.3%.

Answer 20

3.

Expert Solution

To determine

To indicate: The proposals which should be accepted for further analysis, and which should be rejected.

Explanation of Solution

The proposals which should be accepted for further analysis, and which should be rejected is as follows:

Financial & Managerial Accounting, Chapter 25, Problem 25.6BPR , additional homework tip 1

Figure (1)

Proposals A and C are rejected, because proposal A and C fails to meet the required maximum cash back period of 3 years, and they has less rate of return than the other proposals. Hence, Proposals B and D are preferable.

Answer 21

3.

Expert Solution

Answer 22

3.

Expert Solution

Answer 23

Expert Solution

Answer 24

To determine

To indicate: The proposals which should be accepted for further analysis, and which should be rejected.

Answer 25

Explanation of Solution

The proposals which should be accepted for further analysis, and which should be rejected is as follows:

Financial & Managerial Accounting, Chapter 25, Problem 25.6BPR , additional homework tip 1

Figure (1)

Proposals A and C are rejected, because proposal A and C fails to meet the required maximum cash back period of 3 years, and they has less rate of return than the other proposals. Hence, Proposals B and D are preferable.

Answer 26

4.

Expert Solution

To determine

The net present value of preferred proposals.

Explanation of Solution

Calculate the net present value of the proposals which has 12% rate of return as follows:

Proposal B:

Financial & Managerial Accounting, Chapter 25, Problem 25.6BPR , additional homework tip 2

Figure (2)

Hence, the net present value of proposal B is $26,200.

Proposal D:

Figure (3)

Hence, the net present value of proposal D is $29,000.

Answer 27

4.

Expert Solution

Answer 28

4.

Expert Solution

Answer 29

Expert Solution

Answer 30

To determine

The net present value of preferred proposals.

Answer 31

Explanation of Solution

Calculate the net present value of the proposals which has 12% rate of return as follows:

Proposal B:

Financial & Managerial Accounting, Chapter 25, Problem 25.6BPR , additional homework tip 2

Figure (2)

Hence, the net present value of proposal B is $26,200.

Proposal D:

Figure (3)

Hence, the net present value of proposal D is $29,000.

Answer 32

5.

Expert Solution

To determine

To determine: The present value index for each proposal.

Explanation of Solution

The present value index for each proposal is as follows:

Proposal B:

Calculate the present value index for proposal B:

$Present value index for proposal B = Total presest value of cash flowAmount to be invested=$226,200$200,000=1.13$

Hence, the present value index for proposal B is 1.13.

Proposal D:

Calculate the present value index for proposal D:

$Present value index for proposal D= Total presest value of cash flowAmount to be invested=$569,000$540,000=1.05$

Hence, the present value index for proposal Dis 1.05.

Answer 33

5.

Expert Solution

Answer 34

5.

Expert Solution

Answer 35

Expert Solution

Answer 36

To determine

To determine: The present value index for each proposal.

Answer 37

Explanation of Solution

The present value index for each proposal is as follows:

Proposal B:

Calculate the present value index for proposal B:

$Present value index for proposal B = Total presest value of cash flowAmount to be invested=$226,200$200,000=1.13$

Hence, the present value index for proposal B is 1.13.

Proposal D:

Calculate the present value index for proposal D:

$Present value index for proposal D= Total presest value of cash flowAmount to be invested=$569,000$540,000=1.05$

Hence, the present value index for proposal Dis 1.05.

Answer 38

6.

Expert Solution

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of net cash flows.

Explanation of Solution

Proposals are arranged by rank is as follows:

Proposals	Net present value	Rank
Proposal D	$ 29,000	1
Proposal B	$ 26,200	2

Table (5)

Answer 39

6.

Expert Solution

Answer 40

6.

Expert Solution

Answer 41

Expert Solution

Answer 42

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of net cash flows.

Answer 43

Explanation of Solution

Proposals are arranged by rank is as follows:

Proposals	Net present value	Rank
Proposal D	$ 29,000	1
Proposal B	$ 26,200	2

Table (5)

Answer 44

7.

Expert Solution

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of index.

Explanation of Solution

Proposals are arranged by rank is as follows:

Proposals	Present value index	Rank
Proposal B	1.13	1
Proposal D	1.05	2

Table (6)

Answer 45

7.

Expert Solution

Answer 46

7.

Expert Solution

Answer 47

Expert Solution

Answer 48

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of index.

Answer 49

Explanation of Solution

Proposals are arranged by rank is as follows:

Proposals	Present value index	Rank
Proposal B	1.13	1
Proposal D	1.05	2

Table (6)

Answer 50

8.

Expert Solution

To determine

To analysis: The proposal which is favor to investment, and comment on the relative

attractiveness of the proposals based on the rank.

Explanation of Solution

On the basis of net present value:

The net present value of Proposal B is $26,200, and Proposal D is $29,000. In this case, the net present value of proposal D is more than the net present value of proposal B. Hence, investment in Proposal D is preferable.

On the basis of present value index:

The present value index of Proposal B is 1.13, and the present value index of Proposal D is 1.05. In this case, Proposal B has the favorable present value index, because the present value index of Proposal B (1.13) is more than Proposal D (1.05). Thus, the investment in Proposal B is preferable (favorable).

Every business tries to getmaximum profit with minimum investment. Hence, the cost of investment in Proposal B is less than the proposal D. Thus, investment in Proposal B is preferable

Answer 51

8.

Expert Solution

Answer 52

8.

Expert Solution

Answer 53

Expert Solution

Answer 54

To determine

To analysis: The proposal which is favor to investment, and comment on the relative

attractiveness of the proposals based on the rank.

Answer 55

Explanation of Solution

On the basis of net present value:

The net present value of Proposal B is $26,200, and Proposal D is $29,000. In this case, the net present value of proposal D is more than the net present value of proposal B. Hence, investment in Proposal D is preferable.

On the basis of present value index:

The present value index of Proposal B is 1.13, and the present value index of Proposal D is 1.05. In this case, Proposal B has the favorable present value index, because the present value index of Proposal B (1.13) is more than Proposal D (1.05). Thus, the investment in Proposal B is preferable (favorable).

Every business tries to getmaximum profit with minimum investment. Hence, the cost of investment in Proposal B is less than the proposal D. Thus, investment in Proposal B is preferable