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 5 Total Year 1 2 3 4 5 6 7 8 Operating Income 9 10 $54,000 54,000 54,000 54,000 54,000 $270,000 Each project requires an investment of $600,000. 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% 12% 20% 10% 0.909 0.943 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 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 $172,000 172,000 172,000 172,000 172,000 $860,000 0.747 0.705 0.665 0.627 0.592 0.558 Operating Income 15% $113,000 86,000 43,000 19,000 9,000 $270,000 Net Cash Flow $275,000 232,000 163,000 112,000 78,000 $860,000
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 5 Total Year 1 2 3 4 5 6 7 8 Operating Income 9 10 $54,000 54,000 54,000 54,000 54,000 $270,000 Each project requires an investment of $600,000. 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% 12% 20% 10% 0.909 0.943 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 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 $172,000 172,000 172,000 172,000 172,000 $860,000 0.747 0.705 0.665 0.627 0.592 0.558 Operating Income 15% $113,000 86,000 43,000 19,000 9,000 $270,000 Net Cash Flow $275,000 232,000 163,000 112,000 78,000 $860,000
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
Problem 1PS
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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
Operating
Income
8
9
10
$54,000
54,000
54,000
54,000
54,000
$270,000
0.943
Each project requires an investment of $600,000. 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%
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
10%
Net Cash
Flow
0.909
0.826
0.751
$172,000
172,000
172,000
172,000
172,000
$860,000
12%
0.893
0.797
0.756
0.712
0.658
0.683
0.636
0.572
0.621 0.567 0.497
0.564
0.507
0.513
0.467
0.424
0.386
0.452
0.404
15%
0.361
0.322
0.870
0.432
0.376
0.327
0.284
0.247
Operating
Income
$113,000
86,000
43,000
19,000
9,000
$270,000
20%
Greenhouse
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
Net Cash
Flow
$275,000
232,000
163,000
112,000
78,000
$860,000
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
%
Present value of net cash flow
Amount to be invested
%
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 al
net present value because cash flows occur
would be the more attractive.
in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the
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