Capital Rationing Decision Involving Four Proposals

QUESTION

Capital Rationing Decision Involving Four ProposalsRenaissance 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: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..9px;=”” 12px=””>Present Value of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83320.8900.8260.7970.7560.69430.8400.7510.7120.6580.57940.7920.6830.6360.5720.48250.7470.6210.5670.4970.40260.7050.5640.5070.4320.33570.6650.5130.4520.3760.27980.6270.4670.4040.3270.23390.5920.4240.3610.2840.194100.5580.3860.3220.2470.162Required:1. Compute the cash payback period for each of the four proposals..9px;=”” 12px=””>Cash Payback PeriodProposal ASelect4 years3 years3 years 6 months2 years3 years 9 months Proposal BSelect2 years2 years 3 months3 years3 years 3 months4 years Proposal CSelect2 years3 years 3 months2 years 9 months3 years 6 months4 years Proposal DSelect3 years3 years 3 months2 years 3 months2 years 8 months3 years 10 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..9px;=”” 12px=””>Average Rate of ReturnProposal A%Proposal B%Proposal C%Proposal D%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..9px;=”” 12px=””>ProposalCash Payback PeriodAverage Rate of ReturnAccept or RejectASelect2 yrs.3 yrs., 6 mos.4 yrs.2 yrs., 8 mos. %SelectAcceptReject BSelect3 yrs., 4 mos.2 yrs.4 yrs.2 yrs., 8 mos. %SelectAcceptRejectCSelect2 yrs.2 yrs., 8 mos.3 yrs., 4 mos.4 yrs. %SelectAcceptReject DSelect2 yrs.2 yrs., 3 mos.2 yrs., 8 mos.4 yrs. %SelectAcceptReject 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..9px;=”” 12px=””>Select the proposal accepted for further analysis.SelectProposal AProposal C SelectProposal BProposal D Present value of net cash flow total$$Less amount to be invested$$Net present value$$5. Compute the present value index for each of the proposals in part (4). If required, round your answers to two decimal places..9px;=”” 12px=””>Select proposal to compute Present value index.SelectProposal AProposal C SelectProposal BProposal D Present value index (rounded)

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