ACC 212-100 PROJECT Fall 2016 CAPITAL RATIONING INSTRUCTIONS 1) Read the attache

Question

ACC 212-100 PROJECT Fall 2016 CAPITAL RATIONING INSTRUCTIONS 1) Read the attached case: Capital Rationing-JSU Industries 2) Read the accompanying grading rubric 3) Complete the assignment by preparing calculations for each proposal evaluation based on the stated criteria Please use Excel or Google Spreadsheets or some other software product to prepare your work Prepare a memo addressed to Donald McWilliams, Vice Presidents of Operations explaining your ranking of each proposal and tell what methods and criteria on which you based your conclusions Upload your completed assignment as a PDF in blackboard on or before Sunday, November 27, 2016, your completed assignment should contain your memo and the accompanying computation worksheets for all projects 4) 5) 6)

Explanation / Answer

Projects A B C D E Cost I 200000 250000 325000 500000 400000 Life 8 10 10 10 8 Residual Value 0 0 0 0 0 Annual project income II 17000 18000 33000 55000 45000 Annual net cash flows III 42000 43000 65500 105000 95000 Average rate of return (II/I) 8.5% 7.2% 10.2% 11.0% 11.3% Cash payback period (I / III )           4.76           5.81           4.96           4.76           4.21 Averge rate of return for all the projects is les than 15% , hence no project can be acepted. Cash payback period for project B is mor than 5 years. Hence Project B can be eliminated. Project A Project B Project C Project D Project E Years 0 1-8 NPV 0 1-10 NPV 0 1-10 NPV 0 1-10 NPV 0 1-8 NPV Cost -200000 -250000 -325000 -500000 -400000 Annual net cash flows 42000 43000 65500 105000 95000 Discounting rate 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% Present Value factor 1 4.487 1 5.019 1 5.019 1 5.019 1 4.487 Present Vaue -200000 188454 -250000 215817 -325000 328744.5 -500000 526995 -400000 426265 NPV -11546 -34183 3744.5 26995 26265 As the NPV for Projects A and B are negative they will be rejected. Now we calculate the IRR for projects C , D and E IRR is the rate of return at which the NPV for an investment is 0. This is calculated by trial and error method. Project C Project D Project E Years 0 1-10 NPV 0 1-10 NPV 0 1-8 NPV Cost -325000 -500000 -400000 Annual net cash flows 65500 105000 95000 Discounting rate 16% 16% 16% 16% 16% 16% Present Value factor 1 4.833 1 4.833 1 4.344 Present Vaue -325000 316561.5 -500000 507465 -400000 412680 NPV -8438.5 7465 12680 Project C Project D Project E Years 0 1-10 NPV 0 1-10 NPV 0 1-8 NPV Cost -325000 -500000 -400000 Annual net cash flows 65500 105000 95000 Discounting rate 16% 16% 17% 17% 17% 17% Present Value factor 1 4.833 1 4.659 1 4.207 Present Vaue -325000 316561.5 -500000 489195 -400000 399665 NPV -8438.5 -10805 -335 IRR for Project C is between 15% and 16% as the NPV is negative at 16%. IRR for Projects D & E is between 16% and 17% as the NPV is negative at 17%.

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