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. 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 Proposal B Proposal C Proposal D 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 fill in the blank 10 % B fill in the blank 13 % C fill in the blank 16 % D fill in the blank 19 % 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. 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. Present value index (rounded) fill in the blank 31 fill in the blank 32
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. 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 Proposal B Proposal C Proposal D 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 fill in the blank 10 % B fill in the blank 13 % C fill in the blank 16 % D fill in the blank 19 % 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. 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. Present value index (rounded) fill in the blank 31 fill in the blank 32
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
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
| 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 |
|
| Proposal B |
|
| Proposal C |
|
| Proposal D |
|
2. Giving effect to straight-line
| 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 |
|
fill in the blank 10 % |
|
| B |
|
fill in the blank 13 % |
|
| C |
|
fill in the blank 16 % |
|
| D |
|
fill in the blank 19 % |
|
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. |
|
|
| 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. |
|
|
| Present value index (rounded) | fill in the blank 31 | fill in the blank 32 |
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Step 1: Introduction to Capital budgeting:
VIEWStep 2: a. Calculate the payback period as follows:
VIEWStep 3: b. Calculate average rate of return as follows:
VIEWStep 4: 3. Decisions:
VIEWStep 5: 4. Calculate the Net Present Value (NPV) as follows:
VIEWStep 6: 5. Calculate the Profitability Index as follows:
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