Highpoint Company is evaluating five different capital expenditure proposals. The company's hurdle rate for net present value analyses is 12%. A 10% salvage value is expected from each of the investments. Information on the five proposals is as follows: Proposal Required Investment PV at 12% of After-Tax Cash Flows Avg. Annual Net Income from Investment A $265,000 $305,030 $37,400 B 195,000 231,780 26,000 C 155,000 168,040
Highpoint Company is evaluating five different capital expenditure proposals. The company's hurdle rate for
| Proposal | Required Investment | PV at 12% of After-Tax Cash Flows | Avg. Annual Net Income from Investment |
|---|---|---|---|
|
A |
$265,000 | $305,030 | $37,400 |
|
B |
195,000 | 231,780 | 26,000 |
|
C |
155,000 | 168,040 | 19,200 |
|
D |
175,000 | 211,300 | 27,600 |
|
E |
123,000 | 131,990 | 14,960 |
a. Compute the excess present value index for each of the five proposals.
Round answers to three decimal places.
| Proposal | Excess PV Index |
|---|---|
|
A |
Answer |
|
B |
Answer |
|
C |
Answer |
|
D |
Answer |
|
E |
Answer |
b. Compute the average
Round answers to one decimal place. For example, 0.4567 equals 45.7%
| Proposal | Avg. Rate of Return |
|---|---|
|
A |
Answer |
|
B |
Answer |
|
C |
Answer |
|
D |
Answer |
|
E |
Answer |
c. Assume that Highpoint will commit no more than $500,000 to new capital expenditure proposals.
Using the excess present value index, which proposals would be accepted. Select the best answer.
Answer
Now using the average rate of return, which proposals would be accepted? Select the best answer.
Answer
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