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Renaissance Capital Group_Capital Rationoing decision




Question;Capital;Rationing Decision Involving 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.;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;Required;1.;Compute the cash payback period;for each of the four proposals.;Cash Payback Period;Proposal;A;Proposal;B;Proposal;C;Proposal;D;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.;Average Rate of Return;Proposal;A;%;Proposal;B;%;Proposal;C;%;Proposal;D;%;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 on the left and indicate;which proposals should be accepted for further analysis and which should be;rejected. If required, round your answers to one decimal place.;Proposal;Cash Payback Period;Average Rate of Return;Accept or Reject;A;%;B;%;C;%;D;%;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 $1 table above. Round to the nearest dollar.;Select;the proposal accepted for further analysis.;Present;value of net cash flow total;$;$;Less;amount to be invested;$;$;Net;present value;$;$;5.;Compute the present value index;for each of the proposals in part (4). If required, round your answers to two;decimal places.;Select;proposal to compute Present value index.;Present;value index (rounded);6.;Rank the proposals from most;attractive to least attractive, based on the present values of net cash flows;computed in part (4).;Rank;1st;Rank;2nd;7.;Rank the proposals from most;attractive to least attractive, based on the present value indexes computed;in part (5).;Rank;1st;Rank;2nd;8.;The present value indexes indicate;that although Proposal has the larger net present value, it is not as;attractive as Proposal in terms of the amount of present value per dollar;invested. Proposal requires the larger investment. Thus, management should;use investment resources for Proposal before investing in Proposal, absent;any other qualitative considerations that may impact the decision.


Paper#44622 | Written in 18-Jul-2015

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