Unformatted text preview: funds among four proposals. The amount of proposed investment, estimated income from)
operations, and net cash flow for each proposal are as follows:  CW)” 0341“ n
0)”? Wm A C0, [0; Madison Capital Group is considering allocating a limited amount of capital investment} Investment Year Operations Flow $ 42,000 $150,000
42,000 150,000
42,000 150,000 ’} . .
aplm’ (504%ﬁn (18,000) 90,000
tori/my ‘ — — Proposal A: $540,090 LnbLUM—I ‘4 . Pro osal 13: $250,000 1 $ 50,000 $100,000
Ag, maﬁa p 2 40,000 90,000
3 30.000 30,000 ' 4 15,000 65,000 5 15,000 65,000 $150,000 $400,000 Proposal c: $640,000 1 $ 92,000 $220,000 2 82,000 . 210,000 3 32,000 210,000 4 62,000 190,000 5 32,000 150,000 $350,000 $990,000 Proposal D: $310,000 1 $ 68,000 $130,000 2 38,000 100,000 3 (2,000) . 50,000 4 (2,000) 60,000 I 5 (2,000) 60,000 i , . ‘  , $100,000 $410,000 , The company’s capital rationing policy requires a maximum cash payback period 0"?
I three years: In addition, a minimum‘average rate of return of 12% is required on all pro l jects. If the preceding standards are met}th_e net present value method and present valu
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 format, summarize the results of your computatibns in parts (1) an" (2). By placing a check mark in the appropriate column at the right, indicate which pro
posals should be accepted for further analysis and which should be rejected. Cash Payback Average Rate Accept for .
Proposal Period of Return ‘ Further Analysis Reject
A "
B
C
D 4. For the proposals accepted for further analysis in part (3), compute the net present valu
' Use a rate of 12% and the present value of $1 table appearing in this chapter. Round to
the nearest dollar. 5. Compute the present value index for each of the proposals in part (4). Round to tw
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 preposals from most attractive to least attractive, based on the present val ' indexes computed in part (5). ' Based upon the analyses, comment on'the relative attractiveness of the propo
als ranked in parts (6) and (7, . , “., )'_' 3‘. It ...
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 Winter '12
 D.Schmidt

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