# Capital Rationing Decision Inv

Capital Rationing Decision Involving Four Proposals

Kopecky Industries Inc. is considering allocating a limitedamount of capital investment funds among four proposals. The amountof proposed investment, estimated income from operations, and netcash flow for each proposal are as follows:

 Investment Year Income fromOperations Net CashFlows Proposal Sierra: \$850,000 1 \$ 80,000 \$ 250,000 2 80,000 250,000 3 80,000 250,000 4 30,000 200,000 5 (70,000) 100,000 \$200,000 \$ 1,050,000 Proposal Tango: \$1,200,000 1 \$320,000 \$ 560,000 2 320,000 540,000 3 160,000 400,000 4 60,000 300,000 5 (40,000) 220,000 \$820,000 \$2,020,000 Proposal Uniform: \$550,000 1 \$ 90,000 \$ 200,000 2 90,000 200,000 3 90,000 200,000 4 90,000 200,000 5 70,000 180,000 \$430,000 \$ 980,000 Proposal Victor: \$380,000 1 \$44,000 \$ 120,000 2 44,000 120,000 3 44,000 120,000 4 4,000 80,000 5 4,000 80,000 \$140,000 \$ 520,000

The company’s capital rationing policy requires a maximum cashpayback period of three years. In addition, a minimum average rateof return of 12% is required on all projects. If the precedingstandards are met, the net present value method and present valueindexes are used to rank the remaining proposals.

 Present Value of \$1 at CompoundInterest 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. Giving effect to straight-line depreciationon 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.

 Average Rate of Return Proposal Sierra % Proposal Tango % Proposal Uniform % Proposal Victor %

2. For the proposals accepted for furtheranalysis in part (3), compute the net present value. Use a rate of12% and the present value of \$1 table above. If required, use theminus sign to indicate a negative net present value.

 Select the proposal accepted for further analysis. Proposal Tango Proposal Uniform Present value of net cash flow total \$ \$ Amount to be invested Net present value \$ \$

3. Compute the present value index for each ofthe proposals in part (4). Round to two decimal places.

 Select the proposal to compute present value index. Proposal Tango Proposal Uniform Present value index (rounded)

 Proposal Sierra Proposal Tango Proposal Uniform Proposal Victor Year income form operations Year income form operations Year income form operations Year income form operations 1 80000 1 320000 1 90000 1 44000 2 80000 2 320000 2 90000 2 44000 3 80000 3 160000 3 90000 3 44000 4 30000 4 60000 4 90000 4 4000 5 -70000 5 -40000 5 70000 5 4000 Average income from operation = (200000/5) 40000 Average income from operation = (200000/5) 164000 Average income from operation = (200000/5) 86000 Average income from operation = (200000/5) 28000 Initial Investment 850000 Initial Investment 1200000 Initial Investment 550000 Initial Investment 380000 Average rate of return = average income from operation/initialinvestment 4.71% Average rate of return = average income from operation/initialinvestment 13.67% Average rate of return = average income from operation/initialinvestment 15.64% Average rate of return = average income from operation/initialinvestment 7.37% Project Sierra and proposal Victor would be dropped as ARR isless than the required rate of 12% Proposal Tango Proposal Uniform Year net operating cash flow present value of cash inflow Year net operating cash flow present value of cash inflow 0 -1200000 0 -550000 1 560000 500000 1 200000 178571.4 2 540000 446428.57 2 200000 159438.8 3 400000 284712.1 3 200000 142356 4 300000 190655.42 4 200000 127103.6 5 220000 124833.91 5 180000 102136.8 sum of present value of cash inflow 1546630 sum of present value of cash inflow 709606.7 less cash outflow 1200000 less cash outflow 550000 NPV 346630 NPV 159606.7 PI sum of present value of cash inflow/cash outflow 1.29 PI sum of present value of cash inflow/cash outflow 1.29

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