Renaissance 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: Investment Year Income from Operations Net Cash Flow Proposal A: $680,000 1 $64,000 $200,000 2 64,000 200,000 3 64,000 200,000 4 24,000 160,000 5 24,000 160,000 $240,000 $920,000 Proposal B: $320,000 1 $26,000 $90,000 2 26,000 90,000 3 6,000 70,000 4 6,000 70,000 5 (44,000) 20,000 $20,000 $340,000 Proposal C: $108,000 1 $33,400 $55,000 2 31,400 53,000 3 28,400 50,000 4 25,400 47,000 5 23,400 45,000 $142,000 $250,000 Proposal D: $400,000 1 $100,000 $180,000 2 100,000 180,000 3 80,000 160,000 4 20,000 100,000 5 0 80,000 $300,000 $700,000 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. 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. 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. 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 %
Renaissance 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
Investment | Year | Income from Operations | Net Cash Flow | |||
Proposal A: | $680,000 | 1 | $64,000 | $200,000 | ||
2 | 64,000 | 200,000 | ||||
3 | 64,000 | 200,000 | ||||
4 | 24,000 | 160,000 | ||||
5 | 24,000 | 160,000 | ||||
$240,000 | $920,000 | |||||
Proposal B: | $320,000 | 1 | $26,000 | $90,000 | ||
2 | 26,000 | 90,000 | ||||
3 | 6,000 | 70,000 | ||||
4 | 6,000 | 70,000 | ||||
5 | (44,000) | 20,000 | ||||
$20,000 | $340,000 | |||||
Proposal C: | $108,000 | 1 | $33,400 | $55,000 | ||
2 | 31,400 | 53,000 | ||||
3 | 28,400 | 50,000 | ||||
4 | 25,400 | 47,000 | ||||
5 | 23,400 | 45,000 | ||||
$142,000 | $250,000 | |||||
Proposal D: | $400,000 | 1 | $100,000 | $180,000 | ||
2 | 100,000 | 180,000 | ||||
3 | 80,000 | 160,000 | ||||
4 | 20,000 | 100,000 | ||||
5 | 0 | 80,000 | ||||
$300,000 | $700,000 |
The company's capital rationing policy requires a maximum cash payback period of three years. In addition, a minimum average
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.
Cash Payback Period | |
Proposal A: |
|
Proposal B: |
|
Proposal C: |
|
Proposal D: |
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2. Giving effect to straight-line
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 % |
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