Question

1. Kopecky Industries Inc. is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated income from operations, and net cash flow for each proposal are as follows:

   Project Name	Sierra		Tango		Uniform		Victor
   	Investment	$862,500	Investment	$2,025,000	Investment	$1,433,320	Investment	$1,040,013
   Year	Income from Operations	Net Cash Flows	Income from Operations	Net Cash Flows	Income from Operations	Net Cash Flows	Income from Operations	Net Cash Flows
   1	$80,500	$230,000	$279,000	$900,000	$180,000	$400,000	$109,000	$390,000
   2	81,000	230,000	279,275	900,000	180,000	400,000	109,000	390,000
   3	81,500	230,000	279,550	900,000	180,000	400,000	109,000	390,000
   4	82,000	230,000	279,825	900,000	180,000	400,000	109,000	390,000
   5	82,500	230,000	280,100	900,000	180,000	400,000	109,000	390,000
   Total	$407,500	$1,150,000	$1,397,750	$4,500,000	$900,000	$2,000,000	$545,000	$1,950,000

   1. 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

   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 20% is required on all projects. If the preceding standards are met, the A method of analyzing 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.

   Required:

   1. Compute the cash payback period for each of the four proposals. Assume that net cash flows are uniform throughout the year.

   	Cash Payback Period
   Proposal Sierra	3 years 9 months 2 years 3 years 3 years 9 months 3 years 3 months unable to determine
   Proposal Tango	2 years 3 months 2 years 3 years 2 years 3 months 2 years 9 months unable to determine
   Proposal Uniform	3 years 7 months 2 years 3 years 3 years 7 months 3 years 5 months unable to determine
   Proposal Victor	2 years 8 months 2 years 3 years 2 years 8 months 2 years 4 months unable to determine

   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. Round to one decimal place.

   	Average Rate of Return
   Proposal Sierra	%
   Proposal Tango	%
   Proposal Uniform	%
   Proposal Victor	%

   3. Using the results from parts (1) and (2) determine which proposals should be accepted for further analysis and which should be rejected.

   	Accept / Reject
   Proposal Sierra	Reject Accept for further analysis Reject
   Proposal Tango	Accept for further analysis Accept for further analysis Reject
   Proposal Uniform	Reject Accept for further analysis Reject
   Proposal Victor	Accept for further analysis Accept for further analysis Reject

   4. For the proposals accepted for further analysis in part (3), compute the net present value. Use a rate of 12% and the present value of $1 table above. If required, use the minus sign to indicate a subtraction or negative net present value.

   Select the proposal accepted for further analysis.	Proposal Tango Proposal Sierra Proposal Tango	Proposal Victor Proposal Uniform Proposal Victor
   Present value of net cash flow total	$	$
   Amount to be invested
   Net present value	$	$

   5. Compute the present value index for each of the proposals in part (4). Round to two decimal places.

   Select the proposal to compute present value index.	Proposal Tango Proposal Sierra Proposal Tango	Proposal Victor Proposal Uniform Proposal Victor
   Present value index (rounded)

Answer 1

1. Payback period = Investment / Annual cash flow

Project	Investment	Annual cash flow	Payback period
Sierra	862500	230000	3.75	3 years 9 months
Tango	2025000	900000	2.25	2 years 3 months
Uniform	1433320	400000	3.5833	3 years 7 months
Victor	1040013	390000	2.6667	2 years 8 months

2. Average Rate of Return = Average income / Average Investment * 100

Project	Average investment	Income	Average income	Average Rate of Return
Sierra	431250	407500	81500	18.90%
Tango	1012500	1397750	279550	27.61%
Uniform	716660	900000	180000	25.12%
Victor	520007	545000	109000	20.96%

3.

Project	Payback period	Average Rate of Return	Decision
Sierra	3 years 9 months	18.90%	Reject
Tango	2 years 3 months	27.61%	Accept
Uniform	3 years 7 months	25.12%	Accept
Victor	2 years 8 months	20.96%	Reject

4.

	Tango	Uniform
PV of net cash flow*	3244500	1442000
Amount to be invested	-2025000	-1433320
NPV	1219500	8680

* PV of net cash flow

	Tango			Unifom
Year	Cash flow	PVF @ 12%	PV	Cash flow	PVF @ 12%	PV
1	900000	0.893	803700	400000	0.893	357200
2	900000	0.797	717300	400000	0.797	318800
3	900000	0.712	640800	400000	0.712	284800
4	900000	0.636	572400	400000	0.636	254400
5	900000	0.567	510300	400000	0.567	226800
Total			3244500			1442000

5.

	Tango	Uniform
PV index	1.60*	1.01**

* 3244500 / 2025000

** 1442000 / 1433320