Average Rate of Return Method, Net Present Value Method, and Analysis for a service company The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Front-End Loader Year 1 2 3 4 5 Total Year 1 2 3 5 7 8 9 10 Operating Income Required: $38,000 38,000 38,000 38,000 38,000 $190,000 0.943 Each project requires an investment of $380,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis. Present Value of $1 at Compound Interest 6% 10% 0.909 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 Front-End Loader 0.826 0.564 Amount to be invested 0.513 0.467 0.424 0.386 Net Cash Flow $122,000 0.751 0.712 0.683 0.636 0.621 Present value of net cash flow 122,000 122,000 122,000 122,000 S $610,000 The front-end loader has a 12% 0.893 0.797 0.567 0.507 0.452 15% 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.284 0.247 Operating Income $80,000 61,000 30,000 13,000 6,000 X % X % $190,000 20% Greenhouse 0.833 0.404 0.327 0.233 0.361 0.194 0.322 0.162 0.694 0.579 0.482 0.402 0.335 0.279 1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place. Average Rate of Return Net Cash Flow $195,000 165,000 116,000 73,000 79.000 55,000 wwwww $610,000 Greenhouse 1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value. Front-End Loader Greenhouse Net present value 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments. net present value because cash flows accur in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the would be the more attractive.
Average Rate of Return Method, Net Present Value Method, and Analysis for a service company The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Front-End Loader Year 1 2 3 4 5 Total Year 1 2 3 5 7 8 9 10 Operating Income Required: $38,000 38,000 38,000 38,000 38,000 $190,000 0.943 Each project requires an investment of $380,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis. Present Value of $1 at Compound Interest 6% 10% 0.909 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 Front-End Loader 0.826 0.564 Amount to be invested 0.513 0.467 0.424 0.386 Net Cash Flow $122,000 0.751 0.712 0.683 0.636 0.621 Present value of net cash flow 122,000 122,000 122,000 122,000 S $610,000 The front-end loader has a 12% 0.893 0.797 0.567 0.507 0.452 15% 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.284 0.247 Operating Income $80,000 61,000 30,000 13,000 6,000 X % X % $190,000 20% Greenhouse 0.833 0.404 0.327 0.233 0.361 0.194 0.322 0.162 0.694 0.579 0.482 0.402 0.335 0.279 1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place. Average Rate of Return Net Cash Flow $195,000 165,000 116,000 73,000 79.000 55,000 wwwww $610,000 Greenhouse 1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value. Front-End Loader Greenhouse Net present value 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments. net present value because cash flows accur in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the would be the more attractive.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:Average Rate of Return Method, Net Present Value Method, and Analysis for a service company
The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows:
Front-End Loader
Year
1
2
3
4
5
Total
Year
1
2
3
5
7
8
9
10
Operating
Income
Required:
$38,000
38,000
38,000
38,000
38,000
$190,000
0.943
Each project requires an investment of $380,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis.
Present Value of $1 at Compound Interest
6%
10%
0.909
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
Front-End Loader
0.826
0.564
Amount to be invested
0.513
0.467
0.424
0.386
Net Cash
Flow
$122,000
0.751
0.712
0.683 0.636
0.621
Present value of net cash flow
122,000
122,000
122,000
122,000
S
$610,000
The front-end loader has a
12%
0.893
0.797
0.567
0.507
0.452
15%
0.870
0.756
0.658
0.572
0.497
0.432
0.376
0.284
0.247
Operating
Income
$80,000
61,000
30,000
13,000
6,000
X %
X %
$190,000
20%
Greenhouse
0.833
0.404 0.327 0.233
0.361
0.194
0.322
0.162
0.694
0.579
0.482
0.402
0.335
0.279
1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place.
Average Rate of Return
Net Cash
Flow
$195,000
165,000
116,000
73,000
79.000
55,000
wwwww
$610,000
Greenhouse
1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.
Front-End Loader
Greenhouse
Net present value
2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.
net present value because cash flows accur
in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the
would be the more attractive.
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