Renaissance Capital Group_Capital Rationoing decision

$16.00

Description

Capital
Rationing Decision Involving Four Proposals

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:

.gif” alt=”http://cvg.cengagenow.com/ilrn/books/wrfm12h/images/ch25/wrfm12h_ch25_pr25_6a.gif”>

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

%

Proposal
B

%

Proposal
C

%

Proposal
D

%

3.
Using the following format,
summarize the results of your computations in parts (1) and (2) by placing
the calculated amounts in the first two columns on the left and indicate
which proposals should be accepted for further analysis and which should be
rejected. If required, round your answers to one decimal place.

Proposal

Cash Payback Period

Average Rate of Return

Accept or Reject

A

%

B

%

C

%

D

%

4.
For the proposals accepted for
further analysis in part (3), compute the net present value. Use a rate of
15% and the present value of $1 table above. Round to the nearest dollar.

Select
the proposal accepted for further analysis.

Present
value of net cash flow total

$

$

Less
amount to be invested

$

$

Net
present value

$

$

5.
Compute the present value index
for each of the proposals in part (4). If required, round your answers to two
decimal places.

Select
proposal to compute Present value index.

Present
value index (rounded)

6.
Rank the proposals from most
attractive to least attractive, based on the present values of net cash flows
computed in part (4).

Rank
1st

Rank
2nd

7.
Rank the proposals from most
attractive to least attractive, based on the present value indexes computed
in part (5).

Rank
1st

Rank
2nd

8.
The present value indexes indicate
that although Proposal has the larger net present value, it is not as
attractive as Proposal in terms of the amount of present value per dollar
invested. Proposal requires the larger investment. Thus, management should
use investment resources for Proposal before investing in Proposal , absent
any other qualitative considerations that may impact the decision.

Reviews

There are no reviews yet.

Be the first to review “Renaissance Capital Group_Capital Rationoing decision”

Your email address will not be published. Required fields are marked *