Question
In: Finance
Excess Present Value Index and Average Rate of Return Highpoint Company is evaluating five different capital...
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
Solutions
jeff jeffy answered 2 years agoRelated Solutions
Excess Present Value Index and Average Rate of Return Highpoint Company is evaluating five different capital...
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
$285,000
$325,030
$37,400
B
215,000
251,780
26,000
C
175,000
188,040
19,200
D
195,000
231,300
27,600...
Average Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of...
Average Rate of Return Method, Net Present Value Method, and
Analysis
The capital investment committee of Ellis Transport and Storage
Inc. is considering two investment projects. The estimated income
from operations and net cash flows from each investment are as
follows:
Warehouse
Tracking Technology
Year
Income from
Operations
Net Cash
Flow
Income from
Operations
Net Cash
Flow
1
$58,000
$190,000
$122,000
$304,000
2
58,000
190,000
93,000
257,000
3
58,000
190,000
46,000
181,000
4
58,000
190,000
20,000
124,000
5
58,000
190,000...
Average Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of...
Average Rate of Return Method, Net Present Value Method, and
Analysis
The capital investment committee of Ellis Transport and Storage
Inc. is considering two investment projects. The estimated income
from operations and net cash flows from each investment are as
follows:
Warehouse
Tracking Technology
Year
Income from
Operations
Net Cash
Flow
Income from
Operations
Net Cash
Flow
1
$42,000
$138,000
$88,000
$221,000
2
42,000
138,000
67,000
186,000
3
42,000
138,000
34,000
131,000
4
42,000
138,000
15,000
90,000
5
42,000
138,000...
Average Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of...
Average Rate of Return Method, Net Present Value Method, and
Analysis
The capital investment committee of Ellis Transport and Storage
Inc. is considering two investment projects. The estimated income
from operations and net cash flows from each investment are as
follows:
Warehouse
Tracking Technology
Year
Income from
Operations
Net Cash
Flow
Income from
Operations
Net Cash
Flow
1
$34,000
$110,000
$71,000
$176,000
2
34,000
110,000
54,000
149,000
3
34,000
110,000
27,000
105,000
4
34,000
110,000
12,000
72,000
5
34,000
110,000...
Average Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of...
Average Rate of Return Method, Net Present Value Method, and
Analysis
The capital investment committee of Ellis Transport and Storage
Inc. is considering two investment projects. The estimated income
from operations and net cash flows from each investment are as
follows:
Warehouse
Tracking Technology
Year
Income from
Operations
Net Cash
Flow
Income from
Operations
Net Cash
Flow
1
$63,000
$207,000
$132,000
$331,000
2
63,000
207,000
101,000
279,000
3
63,000
207,000
50,000
197,000
4
63,000
207,000
22,000
135,000
5
63,000
207,000...
Average Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of...
Average Rate of Return Method, Net Present Value Method, and
Analysis
The capital investment committee of Ellis Transport and Storage
Inc. is considering two investment projects. The estimated income
from operations and net cash flows from each investment are as
follows:
Warehouse
Tracking Technology
Year
Income from
Operations
Net Cash
Flow
Income from
Operations
Net Cash
Flow
1
$63,000
$197,000
$132,000
$315,000
2
63,000
197,000
101,000
266,000
3
63,000
197,000
50,000
187,000
4
63,000
197,000
22,000
128,000
5
63,000
197,000...
Average Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of...
Average Rate of Return Method, Net Present Value Method, and
Analysis
The capital investment committee of Ellis Transport and Storage
Inc. is considering two investment projects. The estimated income
from operations and net cash flows from each investment are as
follows:
Warehouse
Tracking Technology
Year
Income from
Operations
Net Cash
Flow
Income from
Operations
Net Cash
Flow
1
$43,200
$133,000
$91,000
$213,000
2
43,200
133,000
69,000
180,000
3
43,200
133,000
35,000
126,000
4
43,200
133,000
15,000
86,000
5
43,200
133,000...
Average Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of...
Average Rate of Return Method, Net Present Value Method, and
Analysis
The capital investment committee of Ellis Transport and Storage
Inc. is considering two investment projects. The estimated income
from operations and net cash flows from each investment are as
follows:
Warehouse
Tracking Technology
Year
Income from
Operations
Net Cash
Flow
Income from
Operations
Net Cash
Flow
1
$58,800
$180,000
$123,000
$288,000
2
58,800
180,000
94,000
243,000
3
58,800
180,000
47,000
171,000
4
58,800
180,000
21,000
117,000
5
58,800
180,000...
Average Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of...
Average Rate of Return Method, Net Present Value Method, and
Analysis
The capital investment committee of Ellis Transport and Storage
Inc. is considering two investment projects. The estimated income
from operations and net cash flows from each investment are as
follows:
Warehouse
Tracking Technology
Year
Income from
Operations
Net Cash
Flow
Income from
Operations
Net Cash
Flow
1
$42,500
$139,000
$89,000
$222,000
2
42,500
139,000
68,000
188,000
3
42,500
139,000
34,000
132,000
4
42,500
139,000
15,000
90,000
5
42,500
139,000...
Average Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of...
Average Rate of Return Method, Net Present Value Method, and
Analysis
The capital investment committee of Overnight Express Inc. is
considering two investment projects. The estimated income from
operations and net cash flows from each investment are as
follows:
Distribution Center Expansion
Internet Tracking Technology
Year
Income from
Operations
Net
Cash Flow
Income from
Operations
Net
Cash Flow
1
$ 66,000
$ 226,000
$200,000
$ 360,000
2
66,000
226,000
90,000
250,000
3
66,000
226,000
30,000
190,000
4
66,000
226,000
10,000...
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