Question: This question has to do with Capital Rationing and a decision involing four proposals. Please show your calculations and if possible, explain your calculations/answers. Thanks!
This question has to do with Capital Rationing and a decision involing four proposals. Please show your calculations and if possible, explain your calculations/answers. Thanks!
Kentucky Corp. is considering alloating capital investment dollars among four projects. The amount proposed investment, estimated income from operations, and net cash flow for each project are below:
| Investment | Year | Income from Operations | Net Cash Flows | |
| Sip Project | $600,000 | 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 | ||
| Total | $200,000 | $1,050,000 | ||
| Tag Project | $1,600,000 | 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 | ||
| Total | $820,000 | $2,020,000 | ||
| Unix Project | $500,000 | 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 | ||
| Total | $430,000 | $980,000 | ||
| Vip Project | 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 | ||
| Total | $140,000 | $520,000 |
Kentucky Corp's capital rationing policy requires a maximum cash payback period of three years. Additionally, 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 project proposals.
Present Value of $1 at Compound Interest table
| Year | 6% | 10% | 12% | 15% | 20% |
| 1 | .943 | .909 | .893 | .870 | .833 |
| 2 | .890 | .826 | .797 | .756 | .694 |
| 3 | .840 | .751 | .712 | .658 | .579 |
| 4 | .792 | .683 | .636 | .572 | .482 |
| 5 | .747 | .621 | .567 | .497 | .402 |
| 6 | .705 | .564 | .507 | .432 | .335 |
| 7 | .665 | .513 | .452 | .376 | .279 |
| 8 | .627 | .467 | .404 | .327 | .233 |
| 9 | .592 | .424 | .361 | .284 | .194 |
| 10 | .558 | .386 | .322 | .247 | .162 |
Question
Calculate the payback period for each project. Assume that net cash flows are uniform throughout the year. Then 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 projects. Round to two decimal places.
| Cash Payback Period | |
| Sip Project | |
| Tag Project | |
| Unix Project | |
| Vip Project |
| Average Rate of Return % | |
| Sip Project | |
| Tag Project | |
| Unix Project | |
| Vip Project |
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