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): ___________ ___________
Click here for the solution: Grant Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals
Showing posts with label funds. Show all posts
Showing posts with label funds. Show all posts
Wednesday, November 11, 2015
Grant Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals
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): ___________ ___________
Click here for the solution: Grant Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals
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): ___________ ___________
Click here for the solution: Grant Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals
Wednesday, July 15, 2015
Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement
Lease versus purchase decision (LO4) Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If the company purchases the asset, the cost will be $10,000. It can borrow funds for four years at 12 percent interest. The firm will use the three-year MACRS depreciation category (with the associated four-year write-off). Assume a tax rate of 35 percent.
The other alternative is to sign two operating leases, one with payments of $2,600 for the first two years, and the other with payments of $4,600 for the last two years. In your analysis, round all values to the nearest dollar.
a. Compute the aftertax cost of the leases for the four years.
b. Compute the annual payment for the loan (round to the nearest dollar).
c. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan due to rounding.)
d. Determine the depreciation schedule (see Table 12–9).
e. Compute the aftertax cost of the borrow–purchase alternative.
f. Compute the present value of the aftertax cost of the two alternatives. Use a discount rate of 8 percent.
g. Which alternative should be selected, based on minimizing the present value of aftertax costs?
Click here for the solution: Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement
The other alternative is to sign two operating leases, one with payments of $2,600 for the first two years, and the other with payments of $4,600 for the last two years. In your analysis, round all values to the nearest dollar.
a. Compute the aftertax cost of the leases for the four years.
b. Compute the annual payment for the loan (round to the nearest dollar).
c. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan due to rounding.)
d. Determine the depreciation schedule (see Table 12–9).
e. Compute the aftertax cost of the borrow–purchase alternative.
f. Compute the present value of the aftertax cost of the two alternatives. Use a discount rate of 8 percent.
g. Which alternative should be selected, based on minimizing the present value of aftertax costs?
Click here for the solution: Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement
Monday, July 6, 2015
Renaissance Capital Group is considering allocating a limited amount of capital investment funds among four proposals
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:
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.
Required:
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. If required, round your answers to one decimal place.
3. Using the following format, summarize the results of your computations in parts (1) and (2) by placing the calculated amounts in the first two columns and indicating which proposals should be accepted for further analysis and which should be rejected.
4. For the proposals accepted for further analysis in part (3), compute the net present value. Use a rate of 15% and the present value of $1 in table above. Round to the nearest dollar.
5. Compute the present value index for each of the proposals in part (4). If required, round your answers to two 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 proposals from most attractive to least attractive, based on the present value indexes computed in part (5).
8. Based upon the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7).
Click here for the solution: Renaissance Capital Group is considering allocating a limited amount of capital investment funds among four proposals
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.
Required:
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. If required, round your answers to one decimal place.
3. Using the following format, summarize the results of your computations in parts (1) and (2) by placing the calculated amounts in the first two columns and indicating which proposals should be accepted for further analysis and which should be rejected.
4. For the proposals accepted for further analysis in part (3), compute the net present value. Use a rate of 15% and the present value of $1 in table above. Round to the nearest dollar.
5. Compute the present value index for each of the proposals in part (4). If required, round your answers to two 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 proposals from most attractive to least attractive, based on the present value indexes computed in part (5).
8. Based upon the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7).
Click here for the solution: Renaissance Capital Group is considering allocating a limited amount of capital investment funds among four proposals
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