xcess Present Value Index and Average Rate of Return 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 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 rate of return for each of the five proposals. 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

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 3PB: Net present value method, present value index, and analysis for a service company First United Bank...

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Excess Present Value Index and Average Rate of Return
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	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 rate of return for each of the five proposals.
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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