Average rate of return method, net present value method, and analysis for a service company The capital investment committee of Iguana Inc. is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Robotic Assembler Robotic Assembler Year Operating Income Net Cash Flow Warehouse Operating Income Warehouse Net Cash Flow 1 $41,400 $134,000 $87,000 $214,000 2 41,400 134,000 66,000 181,000 3 41,400 134,000 33,000 127,000 4 41,400 134,000 14,000 87,000 5 41,400 Total $207,000 134,000 $670,000 7,000 $207,000 61,000 $670,000 Each project requires an investment of $460,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis. 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 Required: 1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place. Robotic Assembler Warehouse Average Rate of Return % % 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. Warehouse Robotic Assembler Present value of net cash flow Amount to be invested Net present value $ $ 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments. The robotic assembler has a net present value because cash flows occur in time compared to the warehouse. 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 Iguana Inc. is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Robotic Assembler Robotic Assembler Year Operating Income Net Cash Flow Warehouse Operating Income Warehouse Net Cash Flow 1 $41,400 $134,000 $87,000 $214,000 2 41,400 134,000 66,000 181,000 3 41,400 134,000 33,000 127,000 4 41,400 134,000 14,000 87,000 5 41,400 Total $207,000 134,000 $670,000 7,000 $207,000 61,000 $670,000 Each project requires an investment of $460,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis. 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 Required: 1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place. Robotic Assembler Warehouse Average Rate of Return % % 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. Warehouse Robotic Assembler Present value of net cash flow Amount to be invested Net present value $ $ 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments. The robotic assembler has a net present value because cash flows occur in time compared to the warehouse. 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
Problem 1Q
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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 Iguana Inc. is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows:
Robotic Assembler
Robotic Assembler
Year
Operating Income
Net Cash Flow
Warehouse
Operating
Income
Warehouse
Net Cash Flow
1
$41,400
$134,000
$87,000
$214,000
2
41,400
134,000
66,000
181,000
3
41,400
134,000
33,000
127,000
4
41,400
134,000
14,000
87,000
5
41,400
Total
$207,000
134,000
$670,000
7,000
$207,000
61,000
$670,000
Each project requires an investment of $460,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis.
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
Required:
1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place.
Robotic Assembler
Warehouse
Average Rate of Return
%
%
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.
Warehouse
Robotic Assembler
Present value of net cash flow
Amount to be invested
Net present value
$
$
2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.
The robotic assembler has a
net present value because cash flows occur
in time compared to the warehouse. Thus, if only one of the two projects can be accepted, the
would be the more attractive.
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