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:
|Investment||Year||Income from Operations||Net Cash Flow|
|Proposal A:||$450,000||1||$ 30,000||$120,000|
|Proposal B:||$200,000||1||$ 60,000||$100,000|
|Proposal C:||$320,000||1||$ 36,000||$100,000|
|Proposal D:||$540,000||1||$ 92,000||$200,000|
The company's capital rationing policy requires a maximum The expected period of time that will elapse between the date of a capital expenditure and the complete recovery in cash (or equivalent) of the amount invested.cash payback period of three years. In addition, a minimum A method of evaluating capital investment proposals that focuses on the expected profitability of the investment.average rate of return of 12% is required on all projects. If the preceding standards are met, the A method of analysis of proposed capital investments that focuses on the present value of the cash flows expected from the investments.net present value method and An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested.present value indexes are used to rank the remaining proposals.
|Present Value of $1 at Compound Interest|
1. Compute the cash payback period for each of the four proposals.
|Cash Payback Period|
|Proposal A:||4 years |
|Proposal B:||2 years 4 months |
|Proposal C:||3 years 6 months |
|Proposal D:||3 years |
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 D:|| |
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