Capital rationing decision for a service company involving four proposals Clearcast Communications 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 yean. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are mil, the net present value method and present value indexes are used to rank the remaining proposals. Instructions 1. Compute the cash payback period for each of the four proposals. 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. (Round to one decimal place.) 3. Using the following formal, summarize the results of your computations in parts (l) and (2). By placing the calculated amounts in the first two columns on the left and by placing a check mark in the appropriate column to the right, indicate which proposals should he accepted for further analysis and which should be rejected. 4. For the proposals accepted for further analysts in part (3), compute the net present value. Use a rate of 12% and the present value of $1 table appearing in this chapter (Exhibit 2). 5. Compute the present value index for each of the proposals in part (4). (Round to two decimal places.) 6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4). 7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5). 8. Based on the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7).

BuyFind

Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337119207
BuyFind

Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337119207

Solutions

Chapter
Section
Chapter 25, Problem 25.6BPR
Textbook Problem

Capital rationing decision for a service company involving four proposals

Clearcast Communications 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:

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example  1

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example  2

The company’s capital rationing policy requires a maximum cash payback period of three yean. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are mil, the net present value method and present value indexes are used to rank the remaining proposals.

Instructions

  1. 1. Compute the cash payback period for each of the four proposals.
  2. 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. (Round to one decimal place.)
  3. 3. Using the following formal, summarize the results of your computations in parts (l) and (2). By placing the calculated amounts in the first two columns on the left and by placing a check mark in the appropriate column to the right, indicate which proposals should he accepted for further analysis and which should be rejected.

Chapter 25, Problem 25.6BPR, Capital rationing decision for a service company involving four proposals Clearcast Communications , example  3

  1. 4. For the proposals accepted for further analysts in part (3), compute the net present value. Use a rate of 12% and the present value of $1 table appearing in this chapter (Exhibit 2).
  2. 5. Compute the present value index for each of the proposals in part (4). (Round to two decimal places.)
  3. 6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4).
  4. 7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5).
  5. 8. Based on the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7).

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Chapter 25 Solutions

Financial & Managerial Accounting
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