Question

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

Answer 1