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 Warehouse Operating Warehouse Year Operating Income Net Cash Flow Income Net Cash Flow 1 $60,000 $186,000 $126,000 $298,000 2 60,000 186,000 96,000 251,000 3 60,000 186,000 48,000 177,000 4 60,000 186,000 21,000 121,000 5 60,000 186,000 9,000 83,000 Total $300,000 $930,000 $300,000 $930,000 Each project requires an investment of $600,000. 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 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. Average Rate of Return Robotic Assembler % Warehouse % 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. Robotic Assembler Warehouse 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 larger net present value because cash flows occur earlier the warehouse. Thus, if only one of the two projects can be accepted, the robotic assembler more attractive. in time compared to would be the
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 Warehouse Operating Warehouse Year Operating Income Net Cash Flow Income Net Cash Flow 1 $60,000 $186,000 $126,000 $298,000 2 60,000 186,000 96,000 251,000 3 60,000 186,000 48,000 177,000 4 60,000 186,000 21,000 121,000 5 60,000 186,000 9,000 83,000 Total $300,000 $930,000 $300,000 $930,000 Each project requires an investment of $600,000. 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 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. Average Rate of Return Robotic Assembler % Warehouse % 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. Robotic Assembler Warehouse 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 larger net present value because cash flows occur earlier the warehouse. Thus, if only one of the two projects can be accepted, the robotic assembler more attractive. in time compared to would be the
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
Warehouse
Operating
Warehouse
Year
Operating Income
Net Cash Flow
Income
Net Cash Flow
1
$60,000
$186,000
$126,000
$298,000
2
60,000
186,000
96,000
251,000
3
60,000
186,000
48,000
177,000
4
60,000
186,000
21,000
121,000
5
60,000
186,000
9,000
83,000
Total
$300,000
$930,000
$300,000
$930,000
Each project requires an investment of $600,000. 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
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.
Average Rate of Return
Robotic Assembler
%
Warehouse
%
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.
Robotic Assembler
Warehouse
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 larger net present value because cash flows occur earlier
the warehouse. Thus, if only one of the two projects can be accepted, the robotic assembler
more attractive.
in time compared to
would be the
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