Caotal Rationing Decision for a Service Company Involving Four Proposal Renaissa

Question

Caotal Rationing Decision for a Service Company Involving Four Proposal Renaissance Capital Group is coridering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated ncome from operations, and net cash flow for each proposal are as follows Investment Year OperatioRS Proposal A$680,000 s 64,000 s 200,000 200,000 24,000 160,000 920,000 90,000 Prooosal :$220,000 s 26,000 o,000 s 20,000 340,000 Proposal C: 108000 1 33,400 55,000 O B ViewSonic

Explanation / Answer

Payback Period = A +

Payback Period = A +

Payback Period = A +

Payback Period = A +

working Project A Year Cash flow C Cumulative cash flow Discount factor 15% D Discounted Cash flow D PV of cash inflow 0 -680000 -680000 1 -680000 1 200000 -480000 0.87 174000 174000 2 200000 -280000 0.756 151200 151200 3 200000 -80000 0.658 131600 131600 4 160000 80000 0.572 91520 91520 5 160000 240000 0.497 79520 79520 NPV -52160 627840

Payback Period = A +

A+B/c A is the last period with a negative cumulative cash flow B is the absolute value of cumulative cash flow at the end of the period A C is the total cash flow during the period after A Payback = 3+(80000/160000) 3.5 Average rate of Return Avg Income/Avg investment*100 Avg income 240000/5 48000 Average investment 340000 (680000+0)/2 Average rate of Return 14.12 % 48000/340000*100 Present value Index PV of cash inflow/Initail investment 627840/680000 0.92 Project B Year Cash flow C Cumulative cash flow Discount factor 15% D Discounted Cash flow D PV of cash inflow 0 -320000 -320000 1 -320000 1 90000 -230000 0.87 78300 78300 2 90000 -140000 0.756 68040 68040 3 70000 -70000 0.658 46060 46060 4 70000 0 0.572 40040 40040 5 20000 20000 0.497 9940 9940 NPV -77620 242380

Payback Period = A +

A+B/c A is the last period with a negative cumulative cash flow B is the absolute value of cumulative cash flow at the end of the period A C is the total cash flow during the period after A Payback = 3+(70000/70000) 3 Average rate of Return Avg Income/Avg investment*100 Avg income 20000/5 4000 Average investment 160000 (320000+0)/2 Average rate of Return 2.5 % 4000/160000*100 Present value Index PV of cash inflow/Initail investment 242380/320000 0.76 Project C Year Cash flow C Cumulative cash flow Discount factor 15% D Discounted Cash flow D PV of cash inflow 0 -108000 -108000 1 -108000 1 55000 -53000 0.87 47850 47850 2 53000 0 0.756 40068 40068 3 50000 50000 0.658 32900 32900 4 47000 97000 0.572 26884 26884 5 45000 142000 0.497 22365 22365 NPV 62067 170067

Payback Period = A +

A+B/c A is the last period with a negative cumulative cash flow B is the absolute value of cumulative cash flow at the end of the period A C is the total cash flow during the period after A Payback = 2+(53000/530000) 2 Average rate of Return Avg Income/Avg investment*100 Avg income 142000/5 28400 Average investment 54000 (108000+0)/2 Average rate of Return 52.59 % 28400/54000*100 Present value Index PV of cash inflow/Initail investment 170067/108000 1.57 Project D Year Cash flow C Cumulative cash flow Discount factor 15% D Discounted Cash flow D PV of cash inflow 0 -400000 -400000 1 -400000 1 180000 -220000 0.87 156600 156600 2 180000 -40000 0.756 136080 136080 3 160000 120000 0.658 105280 105280 4 100000 220000 0.572 57200 57200 5 80000 300000 0.497 39760 39760 NPV 94920 494920

Payback Period = A +

A+B/c A is the last period with a negative cumulative cash flow B is the absolute value of cumulative cash flow at the end of the period A C is the total cash flow during the period after A Payback = 2+(40000/160000) 2.25 Average rate of Return Avg Income/Avg investment*100 Avg income 300000/5 60000 Average investment 200000 Average rate of Return 30.00 % 60000/200000*100 Present value Index PV of cash inflow/Initail investment 494920/400000 1.24 ans 1 Payback period Project A 3.5 Project B 3 Project C 2 Project D 2.25 ans b ARR Project A 14.12 Project B 2.5 Project C 52.59 Project D 30.00 ans 3 Payback period ARR Project A 3.5 14.12 Reject Project B 3 2.50 Reject Project C 2 52.59 Accept Project D 2.25 30.00 Accept ans 4 NPV Project C Project D PV of Net cash inflows 170067 494920 Less: initial Investment 108000 400000 NPV 62067 94920 ans 5 Project C Project D 1.57 1.24 ans 6 Rank 1 Project D Rank 2 Project C ans 7 Rank 1 Project C Rank 2 Project D

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