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 Greenhouse Year 1 2 3 Year 1 Operating Income 2 3 4 5 6 7 8 9 10 $25,000 20,000 7,000 3,000 1,250 $56,250 Net Cash Flow $ 40,000 35,000 22,000 18,000 16,250 $131,250 12% Operating Income $11,250 11,250 11,250 15% 4 5 Total Each project requires an investment of $75,000. 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 10% 6% 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 11,250 11,250 $56,250 20% 0.909 0.893 0.870 0.826 0.797 0.756 0.694 0.751 0.712 0.658 0.579 0.683 0.636 0.572 0.482 0.621 0.567 0.497 0.402 0.564 0.507 0.432 0.335 0.513 0.452 0.376 0.279 0.467 0.404 0.327 0.233 0.424 0.361 0.284 0.194 0.386 0.322 0.247 0.162 Net Cash Flow 0.833 $ 26,250 26,250 26,250 26,250 26,250 $131,250
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 Greenhouse Year 1 2 3 Year 1 Operating Income 2 3 4 5 6 7 8 9 10 $25,000 20,000 7,000 3,000 1,250 $56,250 Net Cash Flow $ 40,000 35,000 22,000 18,000 16,250 $131,250 12% Operating Income $11,250 11,250 11,250 15% 4 5 Total Each project requires an investment of $75,000. 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 10% 6% 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 11,250 11,250 $56,250 20% 0.909 0.893 0.870 0.826 0.797 0.756 0.694 0.751 0.712 0.658 0.579 0.683 0.636 0.572 0.482 0.621 0.567 0.497 0.402 0.564 0.507 0.432 0.335 0.513 0.452 0.376 0.279 0.467 0.404 0.327 0.233 0.424 0.361 0.284 0.194 0.386 0.322 0.247 0.162 Net Cash Flow 0.833 $ 26,250 26,250 26,250 26,250 26,250 $131,250
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Required:
1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place.
Average Rate of Return
Greenhouse
Front-End Loader
1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, round to the nearest dollar.
Front-End Loader
Greenhouse
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 front-end loader has a
net present value because
would be the more attractive.
cash flows occur earlier in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the
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
Greenhouse
Year
1
2
3
4
Year
1
2
3
4
5
6
7
8
9
10
Operating
Income
0.558
$25,000
20,000
7,000
3,000
1,250
$56,250
5
Total
Each project requires an investment of $75,000. 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
6%
10%
0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.909
0.826
0.751
0.683
0.621
0.564
0.513
Net Cash
Flow
0.467
0.424
0.386
$ 40,000
35,000
22,000
18,000
16,250
$131,250
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
15%
0.870
0.756
0.658
0.572
0.497
0.432
0.376
0.327
0.284
Operating
Income
0.247
$11,250
11,250
11,250
11,250
11,250
$56,250
20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
Net Cash
Flow
$ 26,250
26,250
26,250
26,250
26,250
$131,250
0.162
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