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 Operating Income Net Cash Flow   Operating Income Net Cash Flow 1 $45,600   $149,000     $96,000   $238,000   2 45,600   149,000     73,000   201,000   3 45,600   149,000     36,000   142,000   4 45,600   149,000     16,000   97,000   5 45,600   149,000     7,000   67,000   Total $228,000   $745,000     $228,000   $745,000     Each project requires an investment of $480,000. 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 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.   Average Rate of Return Front-End Loader fill in the blank 1% Greenhouse fill in the blank 2% 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 $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 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.

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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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 Operating
Income
Net Cash
Flow
  Operating
Income
Net Cash
Flow
1 $45,600   $149,000     $96,000   $238,000  
2 45,600   149,000     73,000   201,000  
3 45,600   149,000     36,000   142,000  
4 45,600   149,000     16,000   97,000  
5 45,600   149,000     7,000   67,000  
Total $228,000   $745,000     $228,000   $745,000  

 

Each project requires an investment of $480,000. 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
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.

  Average Rate of Return
Front-End Loader fill in the blank 1%
Greenhouse fill in the blank 2%

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 $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 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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