Grant 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:
Investments Year Income from Net cash operations flow
Proposal A: $425,000 1 $ 40,000 $125,000
2 40,000 125,000
3 40,000 125,000
4 15,000 100,000
5 (35,000) 50,000
------------- -------------
$100,000 $525,000
-------------- -------------
Proposal B: $610,000 1 $ 158,000 $280,000
2 158,000 280,000
3 78,000 200,000
4 28,000 150,000
5 (22,000) 100,000
----------------- -------------
$400,000 $1,010,000
--------------- ---------------
Proposal C: $275,000 1 $45,000 $ 100,000
2 45,000 100,000
3 45,000 100,000
4 45,000 100,000
5 35,000 90,000
----------- -------------
$215,000 $490,000
------------ -------------
Investment Year Income From Net Cash
operations Flow
Proposal D: $190,000 1 $22,000 $60,000
2 22,000 60,000
3 22,000 60,000
4 2,000 40,000
5 2,000 40,000
---------- -------------
$70,000 $260,000
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
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 1 decimal place.
Average rate of return
Proposal A:_______________%
Proposal B:_______________%
Proposal C:_______________%
Proposal D:_______________%
5.Compute the present value index for each of the proposals in (4). Round to 2 decimal places.
Select proposal to compute Present value index. __A or B___ __ C or D___
Present value index (rounded): ___________ ___________
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