Problem 26-1AQuestion 1aAverage annual rate of return for both projects%bNet Present Value for Front-End LoaderNet Present Value for Greenhouse Fixtures The capital investment committee of Nature's Portrait Landscaping Company isconsidering two capital investments. The estimated income from operations andnet cash flows from each investment are as follows:Front-End LoaderGreenhouse FixturesIncome fromNet CashIncome fromNet CashYear Operations$25,000Flow$40,000Operations$11,250Flow1$26,250220,00035,00011,25026,25037,00022,00011,25026,25043,00018,00011,25026,25051,25016,25011,25026,250Total$56,250$131,250$56,250$131,250Each project requires an investment of $75,000. Straight-line depreciation will beused, and no residual value is expected. The committee has selected a rate of 12%for purposes of the net present value analysis.Instructions:1. Compute the following:a. The average rate of return for each investment. Round to one decimalpoint.b. The net present value for each investment. Use the present value of $1table appearing in this chapter (Exhibit 2). Round present values to thenearest dollar.

The question is based on the concept of cost accounting.Average Rate of Return = Average Net Income/Average Investment Average Investment = (Beginning Investment + Ending Investment)/2 = (75,000+0)/2 = $37,500 Average rate of return = Average Income/Average Investment Front end Loader = 11,250/37,500 =30% Greenhouse = 11,250/37,500 =30%NPV = Present value of cash inflows – Present value of cash outflows Front end Loader Greenhouse Present Value of net cash flow 99,935.25 26,250*3.605 = $94,631.25 Amount to be invested 75000 75000 Net Present Value 24,935.25 19,631.25 Higher NPV, Earlier in time Front end loader is more attractive Higher net present value of front end loader makes it a better investment Working: Year Net Cash Flow PVF @12% PV 1 40000 0.893 35714.29 2 35000 0.797 27901.79 3 22000 0.712 15659.17 4 18000 0.636 11439.33 5 16250 0.567 9220.69 131250 99935.25

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The capital investment committee of Nature's Portrait 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 Fixtures Income from Net Cash Income from Net Cash Year Operations $25,000 Flow $40,000 Operations $11,250 Flow $26,250 1 2 20,000 35,000 11,250 26,250 7,000 22,000 11,250 26,250 4 3,000 18,000 11,250 26,250

The capital investment committee of Nature's Portrait 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 Fixtures Income from Net Cash Income from Net Cash Year Operations $25,000 Flow $40,000 Operations $11,250 Flow $26,250 1 2 20,000 35,000 11,250 26,250 7,000 22,000 11,250 26,250 4 3,000 18,000 11,250 26,250

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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