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 income from operations and net cash flows from each investment are as follows: Front-End Loader Greenhouse Income from Net Cash Income from Net Cash Year Operations Flow Operations Flow 1 $50,000 $158,000 $105,000 $253,000 2. 50,000 158,000 80,000 213,000 3 50,000 158,000 40,000 150,000 4. 50,000 158,000 18,000 103,000 5 50,000 158,000 7,000 71,000 Total $250,000 $790,000 $250,000 $790,000 Each project requires an investment of $500,000. Straight-line depreciation will be used, and no residual value expected. The committee has selected a rate of 15% for purposes of the net present value analysis.

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Average Rate of Return Method, Net Present Value Method, and Analysis for a service company

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 income from operations and net cash flows from each investment are as follows:
Front-End Loader
Greenhouse
Income from
Net Cash
Income from
Net Cash
Year
Operations
Flow
Operations
Flow
$50,000
$158,000
$105,000
$253,000
2
50,000
158,000
80,000
213,000
3
50,000
158,000
40,000
150,000
4
50,000
158,000
18,000
103,000
5
50,000
158,000
7,000
71,000
Total
$250,000
$790,000
$250,000
$790,000
Each project requires an investment of $500,000. 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
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683
0.636
0.572
0.482
0.747
0.621
0.567
0.497
0.402
0.705
0.564
0.507
0.432
0.335
7
0.665
0.513
0.452
0.376
0.279
0.627
0.467
0.404
0.327
0.233
0.592
0.424
0.361
0.284
0.194
10
0.558
0.386
0.322
0.247
0.162
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 income from operations and net cash flows from each investment are as follows: Front-End Loader Greenhouse Income from Net Cash Income from Net Cash Year Operations Flow Operations Flow $50,000 $158,000 $105,000 $253,000 2 50,000 158,000 80,000 213,000 3 50,000 158,000 40,000 150,000 4 50,000 158,000 18,000 103,000 5 50,000 158,000 7,000 71,000 Total $250,000 $790,000 $250,000 $790,000 Each project requires an investment of $500,000. 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 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 0.627 0.467 0.404 0.327 0.233 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
Front-End Loader
%
Greenhouse
1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value.
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 cash flows occur
in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the
would be the more attractive.
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 Front-End Loader % Greenhouse 1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value. 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 cash flows occur 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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