1. Capital Rationing Decision for a Service Company 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 operating income, and net cash flow for each proposal are as follows:

   	Investment	Year		Operating Income		Net Cash Flow
   Proposal A:	$680,000	1		$ 64,000		$ 200,000
   		2		64,000		200,000
   		3		64,000		200,000
   		4		24,000		160,000
   		5		24,000		160,000
   				$240,000		$ 920,000
   Proposal B:	$320,000	1		$ 26,000		$ 90,000
   		2		26,000		90,000
   		3		6,000		70,000
   		4		6,000		70,000
   		5		(44,000)		20,000
   				$ 20,000		$340,000
   Proposal C:	$108,000	1		$ 33,400		$ 55,000
   		2		31,400		53,000
   		3		28,400		50,000
   		4		25,400		47,000
   		5		23,400		45,000
   				$142,000		$ 250,000
   Proposal D:	$400,000	1		$100,000		$ 180,000
   		2		100,000		180,000
   		3		80,000		160,000
   		4		20,000		100,000
   		5		0		80,000
   				$300,000		$700,000

   The company's capital rationing policy requires a maximum The expected period of time that will elapse between the date of a capital expenditure and the complete recovery in cash (or equivalent) of the amount invested.cash payback period of three years. In addition, a minimum A method of evaluating capital investment proposals that focuses on the expected profitability of the investment.average rate of return of 12% is required on all projects. If the preceding standards are met, the A method of analysis of proposed capital investments that focuses on the present value of the cash flows expected from the investments.net present value method and An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested.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 3 years 6 months Proposal B 4 years Proposal C 2 years Proposal D 2 years 3 months 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 % LINE 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 3 years, 6 months % Reject 4 years Reject 2 years % Accept 2 years, 3 months Accept 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. Proposal C Proposal D 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. Proposal Proposal D 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 Proposal D Rank 2nd Proposal C 7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5). Rank 1st Proposal Rank 2nd Proposal D 8. The analysis indicates that although Proposal DV has the larger net present value, it is not as attractive as Proposal CV in terms of the amount of present value per dollar invested. Proposal DV requires the larger investment. Thus, management should use investment resources for Proposal CV before investing in Proposal DV, absent any other qualitative considerations that may impact the decision