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.
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.
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 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: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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