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: Investment Year Income from Operations Net Cash Flow Proposal A: $680,000 1 $64,000 $200,000 2 64,000 200,000 3 64,000 200,000 4 24,000 160,000 5 24,000 160,000 $240,000 $920,000 Proposal B: $320,000 1 $26,000 $90,000 2 26,000 90,000 3 6,000 70,000 4 6,000 70,000 5 (44,000) 20,000 $20,000 $340,000 Proposal C: $108,000 1 $33,400 $55,000 2 31,400 53,000 3 28,400 50,000 4 25,400 47,000 5 23,400 45,000 $142,000 $250,000 Proposal D: $400,000 1 $100,000 $180,000 2 100,000 180,000 3 80,000 160,000 4 20,000 100,000 5 0 80,000 $300,000 $700,000 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: fill in the blank 5 % Proposal B: fill in the blank 6 % Proposal C: fill in the blank 7 % Proposal D: fill in the blank 8 %

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: Investment Year Income from Operations Net Cash Flow Proposal A: $680,000 1 $64,000 $200,000 2 64,000 200,000 3 64,000 200,000 4 24,000 160,000 5 24,000 160,000 $240,000 $920,000 Proposal B: $320,000 1 $26,000 $90,000 2 26,000 90,000 3 6,000 70,000 4 6,000 70,000 5 (44,000) 20,000 $20,000 $340,000 Proposal C: $108,000 1 $33,400 $55,000 2 31,400 53,000 3 28,400 50,000 4 25,400 47,000 5 23,400 45,000 $142,000 $250,000 Proposal D: $400,000 1 $100,000 $180,000 2 100,000 180,000 3 80,000 160,000 4 20,000 100,000 5 0 80,000 $300,000 $700,000 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: fill in the blank 5 % Proposal B: fill in the blank 6 % Proposal C: fill in the blank 7 % Proposal D: fill in the blank 8 %

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 7PA: There are two projects under consideration by the Rainbow factory. Each of the projects will require...

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	Investment	Year		Income from Operations	Net Cash Flow
Proposal A:	$680,000	1		$64,000	$200,000
2	64,000	200,000
3	64,000	200,000
4	24,000	160,000
5	24,000	160,000
	$240,000	$920,000
Proposal B:	$320,000	1	$26,000	$90,000
2	26,000	90,000
3	6,000	70,000
4	6,000	70,000
5	(44,000)	20,000
	$20,000	$340,000
Proposal C:	$108,000	1	$33,400	$55,000
2	31,400	53,000
3	28,400	50,000
4	25,400	47,000
5	23,400	45,000
	$142,000	$250,000
Proposal D:	$400,000	1	$100,000	$180,000
2	100,000	180,000
3	80,000	160,000
4	20,000	100,000
5	0	80,000
	$300,000	$700,000

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:	fill in the blank 5 %
Proposal B:	fill in the blank 6 %
Proposal C:	fill in the blank 7 %
Proposal D:	fill in the blank 8 %

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