Chapter 11, Problem 1PA

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:

Each project requires an investment of $75,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis.

Instructions

1. 1. Compute the following:
   1. A. The average rate of return for each investment.
   2. B. The net present value for each investment. Use the present value table appearing in Exhibit 2 of this chapter. (Round present values to the nearest dollar.)
2. 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.