In: Finance
Excess Present Value Index and Average Rate of
Return
Highpoint Company is evaluating five different capital expenditure
proposals. The company's hurdle rate for net present value analyses
is 12%. A 10% salvage value is expected from each of the
investments. Information on the five proposals is as follows:
Proposal | Required Investment | PV at 12% of After-Tax Cash Flows | Avg. Annual Net Income from Investment |
---|---|---|---|
A |
$275,000 | $315,030 | $37,400 |
B |
205,000 | 241,780 | 26,000 |
C |
165,000 | 178,040 | 19,200 |
D |
185,000 | 221,300 | 27,600 |
E |
133,000 | 141,990 | 14,960 |
a. Compute the excess present value index for each of the five
proposals.
Round answers to three decimal places.
Proposal | Excess PV Index |
---|---|
A |
Answer |
B |
Answer |
C |
Answer |
D |
Answer |
E |
Answer |
b. Compute the average rate of return for each of the five
proposals.
Round answers to one decimal place. For example, 0.4567 equals
45.7%
Proposal | Avg. Rate of Return |
---|---|
A |
Answer |
B |
Answer |
C |
Answer |
D |
Answer |
E |
Answer |
c. Assume that Highpoint will commit no more than $500,000 to new
capital expenditure proposals.
Using the excess present value index, which proposals would be accepted. Select the best answer.
AnswerProposals A and BProposals B and EProposals B and DProposals C and EProposals A and D
Now using the average rate of return, which proposals would be accepted? Select the best answer.
AnswerProposals A and BProposals B and EProposals B and DProposals C and EProposals A and D