• How does using the capital investment tools help you decide what proposal to recommend to the company?

PR 11-63 Capital rationing decision for a service company involving Obi. 2, 3, 5 four proposals 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: Income from Net Cash Investment Year Operations Flow Proposal A: $450,000 1 5 30,000 $120,000 2 30,000 1 20,000 3 20,000 1 10,000 4 10,000 1 00,000 5 (30,000) 60,000 $ 60,000 $510,000 Proposal B: $200,000 1 $ 60,000 $100,000 2 40,000 80,000 3 20,000 60,000 4 (10,000) 30,000 5 (20,000) 20,000 $ 90,000 $290,000 (Continued) Income from Net Cash Investment Year Operations Flow Proposal C: $320,000 1 $ 36,000 $100,000 2 26,000 90,000 3 26,000 90,000 4 16,000 80,000 5 16,000 80,000 $120,000 $440,000 Proposal D: $540,000 1 $ 92,000 $200,000 2 72,000 180,000 3 52,000 160,000 4 1 2,000 120,000 5 (8,000) 100,000 $220,000 $760,000 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. 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 computations in parts (1) and (2). By placing the calculated amounts in the rst two columns on the left and by placing . Using the following format, summarize the results of your computations in parts (1) and (2). By placing the calculated amounts in the rst two columns on the left and by placing a check mark in the appropriate column to the right, indicate which proposals 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 . For the proposals accepted for further analysis in part (3), compute the net present value. Use a rate of 12% and the present value of 31 table appearing in this chapter (Exhibit 2). . Compute the present value index for each of the proposals in part (4). (Round to two decimal places.) . Rank the proposals from most attractive to least attractive, based on the present values of net cash ows computed in part (4). . Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5). . Based on the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7)