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: Year Robotic Assembler Operating Income Robotic Assembler Net Cash Flow Warehouse Operating Income Warehouse Net Cash Flow 1 $47,500 $152,000 $100,000 $243,000 2 47,500 152,000 76,000 205,000 3 47,500 152,000 38,000 144,000 4 47,500 152,000 17,000 99,000 5 47,500 152,000 6,500 69,000 Total $237,500 $760,000 $237,500 $760,000   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. 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. Investment Committee 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. Line Item Description Robotic Assembler Warehouse Present value of net cash flow $fill in the blank 3 $fill in the blank 4 Amount to be invested fill in the blank 5 fill in the blank 6 Net present value $fill in the blank 7 $fill in the blank 8 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 fill in the blank 1 of 3    net present value because cash flows occur fill in the blank 2 of 3    in time compared to the warehouse. Thus, if only one of the two projects can be accepted, the fill in the blank 31 of 3  would be the more attractive.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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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:

Year Robotic Assembler
Operating Income
Robotic Assembler
Net Cash Flow
Warehouse
Operating Income
Warehouse
Net Cash Flow
1 $47,500 $152,000 $100,000 $243,000
2 47,500 152,000 76,000 205,000
3 47,500 152,000 38,000 144,000
4 47,500 152,000 17,000 99,000
5 47,500 152,000 6,500 69,000
Total $237,500 $760,000 $237,500 $760,000

 

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.

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.

Investment Committee 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.

Line Item Description Robotic Assembler Warehouse
Present value of net cash flow $fill in the blank 3 $fill in the blank 4
Amount to be invested fill in the blank 5 fill in the blank 6
Net present value $fill in the blank 7 $fill in the blank 8

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 fill in the blank 1 of 3

 

 net present value because cash flows occur fill in the blank 2 of 3

 

 in time compared to the warehouse. Thus, if only one of the two projects can be accepted, the fill in the blank 31 of 3

 would be the more attractive.

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