Renaissance Capital Group is considering allocating a limited amount of capital investment funds among four...
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Renaissance Capital Group 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:
Proposal
Investment
Year
Operating Income
Net Cash Flow
Proposal A:
$500,000
1
$ 45,000
$ 145,000
Proposal A:
2
40,000
140,000
Proposal A:
3
25,000
125,000
Proposal A:
4
20,000
120,000
Proposal A:
5
5,000
105,000
Total
$135,000
$635,000
Proposal B:
$400,000
1
$ 40,000
$ 120,000
Proposal B:
2
20,000
100,000
Proposal B:
3
10,000
90,000
Proposal B:
4
10,000
90,000
Proposal B:
5
6,000
86,000
Total
$ 86,000
$486,000
Proposal C:
$380,000
1
$ 54,000
$ 130,000
Proposal C:
2
49,000
125,000
Proposal C:
3
49,000
125,000
Proposal C:
4
44,000
120,000
Proposal C:
5
44,000
120,000
Total
$240,000
$620,000
Proposal D:
$675,000
1
$135,000
$270,000
Proposal D:
2
120,000
255,000
Proposal D:
3
90,000
225,000
Proposal D:
4
15,000
150,000
Proposal D:
5
10,000
145,000
Total
$370,000
$1,045,000
The company's capital rationing policy requires a maximum cash payback period of 3 years. In addition, a minimum average rate of return of 10% 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.
Proposal
Cash Payback Period
Proposal A
2 years3 years3 years 6 months3 years 9 months4 years3 years 9 months
Proposal B
2 years2 years 3 months3 years3 years 3 months4 years4 years
Proposal C
2 years2 years 9 months3 years3 years 6 months4 years3 years
Proposal D
2 years 3 months2 years 8 months3 years3 years 3 months3 years 10 months2 years 8 months
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.
Proposal
Average Rate of Return
Proposal A
fill in the blank 5 %
Proposal B
fill in the blank 6 %
Proposal C
fill in the blank 7 %
Proposal D
fill in the blank 8 %
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
2 years2 years, 8 months3 years, 9 months4 years3 years, 9 months
fill in the blank 10 %
AcceptRejectReject
B
2 years2 years, 8 months3 years, 4 months4 years4 years
fill in the blank 13 %
AcceptRejectReject
C
2 years2 years, 8 months3 years4 years3 years
fill in the blank 16 %
AcceptRejectAccept
D
2 years2 years, 3 months2 years, 8 months4 years2 years, 8 months
fill in the blank 19 %
AcceptRejectAccept
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.
Line Item Description
Answer
Answer
Select the proposal accepted for further analysis.
Proposal AProposal CProposal C
Proposal BProposal DProposal D
Present value of net cash flow total
$fill in the blank 23
$fill in the blank 24
Less amount to be invested
fill in the blank 25
fill in the blank 26
Net present value
$fill in the blank 27
$fill in the blank 28
5. Compute the present value index for each of the proposals in part (4). If required, round your answers to two decimal places.
Line Item Description
Answer
Answer
Select proposal to compute Present value index.
Proposal AProposal CProposal C
Proposal BProposal DProposal D
Present value index (rounded)
fill in the blank 31
fill in the blank 32
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