Chapter 26, Problem 26.1APR

Average rate of return method, net present value method, and analysis for a service company

The capital Investment committee of Touch of Eden Landscaping Company is considering two capital investments. The estimated income from operations and net cash flows from each investment are as follows:

Each project requires an investment of $60,000. 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. Compute the following:

a. The average rate of return for each investment. Round to one decimal place.

b. The net present value for each investment. Use the present value of $1 table appearing in this chapter (Exhibit 2). Round present values to the nearest dollar.

2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments .