Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883



Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Capital rationing decision involving four proposals

Kopecky Industries Inc. 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 allprojects. 1f the preceding standards are met, the net present value method and presentvalue indexes are used to rank the remaining proposals.

Compute the present value index for each oldie proposals in part (4). Round to two decimal places.

To determine

Concept Introduction:


Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:

  NPV = Present value of cash inflows  Present value of cash out flows

To Calculate:

The Present Value Index for each accepted project


The Present Value Index for each accepted project is calculated as follows:

    Proposal TangoNet Cash Flows PVF (12%) PV
    A B C =A*B
    Year 1 $ 560,000 0.8929 $ 500,000
    Year 2 $ 540,000 0.7972 $ 430,485
    Year 3 $ 400,000 0.7118 $ 284,712
    Year 4 $ 300,000 0.6355 $ 190,655
    Year 5 $ 220,000 0.5674 $ 124,834
    Present Value of Cash Inflows (D) $ 1,530,686
    Investment (E) $ 1,200,000
    Present Value Index (D/E) 1...

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