average Rate of Return Method, Net Present Value Method, 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 Year 1 2 3 4 5 Total Year 1 2 3 4 5 6 7 Operating Income 8 9 10 Required: $62,000 62,000 62,000 62,000 62,000 $310,000 0.943 0.890 Each project requires an investment of $620,000. Straight-line depreciation.will be used, and no residual value is expected. The committee has selected a rate of 10% for purposes of the net present value analysis. Present Value of $1 at Compound Interest 6% 10% 0.909 0.826 0.840 0.751 0.712 0.792 0.683 0.636 0.747 0.621 0.567 0.497 0.705 0.564 0.665 0.513 0.627 0.467 0.592 0.424 0.558 0.386 0.322 Front-End Loader Greenhouse Net Cash Flow $187,000 187,000 187,000 187,000 187,000 $935,000 Present value of net cash flow Amount to be invested 12% 0.893 0.870 0.797 0.756 0.658 0.572 15% 0.361 Operating Income 0.833 0.694 0.579 0.482 0.402 0.507 0.432 0.335 0.452 0.376 0.279 0.404 0.327 0.233 0.284 0.194 0.247 P% $130,000 99,000 50,000 22,000 9,000 $310,000 8% 20% Greenhouse 1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place. Average Rate of Return 0.162 Net Cash Flow $299,000 252,000 178,000 122,000 84,000 $935,000 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. Front-End Loader Greenhouse 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
average Rate of Return Method, Net Present Value Method, 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 Year 1 2 3 4 5 Total Year 1 2 3 4 5 6 7 Operating Income 8 9 10 Required: $62,000 62,000 62,000 62,000 62,000 $310,000 0.943 0.890 Each project requires an investment of $620,000. Straight-line depreciation.will be used, and no residual value is expected. The committee has selected a rate of 10% for purposes of the net present value analysis. Present Value of $1 at Compound Interest 6% 10% 0.909 0.826 0.840 0.751 0.712 0.792 0.683 0.636 0.747 0.621 0.567 0.497 0.705 0.564 0.665 0.513 0.627 0.467 0.592 0.424 0.558 0.386 0.322 Front-End Loader Greenhouse Net Cash Flow $187,000 187,000 187,000 187,000 187,000 $935,000 Present value of net cash flow Amount to be invested 12% 0.893 0.870 0.797 0.756 0.658 0.572 15% 0.361 Operating Income 0.833 0.694 0.579 0.482 0.402 0.507 0.432 0.335 0.452 0.376 0.279 0.404 0.327 0.233 0.284 0.194 0.247 P% $130,000 99,000 50,000 22,000 9,000 $310,000 8% 20% Greenhouse 1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place. Average Rate of Return 0.162 Net Cash Flow $299,000 252,000 178,000 122,000 84,000 $935,000 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. Front-End Loader Greenhouse 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
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 operating income and net cash flows from each investment are as follows:
Front-End Loader
Year
1
2
3
4
5
Total
Year
1
2
3
4
5
6
7
8
9
10
Required:
Operating
Income
$62,000
62,000
62,000
62,000
62,000
$310,000
Each project requires an investment of $620,000. Straight-line depreciation.will be used, and no residual value is expected. The committee has selected a rate of 10% for purposes of the net present value analysis.
Present Value of $1 at Compound Interest
6%
10%
15%
0.943
0.909
0.870
0.890
0.826
0.756
0.840
0.751
0.658
0.792
0.683
0.636
0.572
0.747
0.621
0.567 0.497
0.705
0.564 0.507 0.432
0.665
0.513
0.452 0.376
0.627
0.467
0.404
0.327
0.592
0.361
0.284
0.558
0.322 0.247
Front-End Loader
Greenhouse
0.424
Net Cash
Flow
$187,000
187,000
187,000
0.386
187,000
187,000
$935,000
12%
0.893
0.797
0.712
Operating
Income
Greenhouse
$130,000
99,000
50,000
22,000
9,000
$310,000
$
20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place.
Average Rate of Return
%%
Net Cash
Flow
$299,000
252,000
178,000
122,000
84,000
$935,000
%
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.
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
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