Average rate of return method, net present value method, and analysisThe 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 Year Income from operations Net cash flow Income from operations Net cash flow 1 $25,000 $40,000 $11,250 $26,250 2 20,000 35,000 11,250 26,250 3 7,000 22,000 11,250 26,250 4 3,000 18,000 11,250 26,250 5 1,250 16,250 11,250 26,250 Total $56,250 $131,250 $56,250 $131,250 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.Instructions1. 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.
Average rate of return method, net present value method, and analysisThe 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 Year Income from operations Net cash flow Income from operations Net cash flow 1 $25,000 $40,000 $11,250 $26,250 2 20,000 35,000 11,250 26,250 3 7,000 22,000 11,250 26,250 4 3,000 18,000 11,250 26,250 5 1,250 16,250 11,250 26,250 Total $56,250 $131,250 $56,250 $131,250 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.Instructions1. 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.
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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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 | |||
| Year | Income from operations | Net cash flow | Income from operations | Net cash flow |
| 1 | $25,000 | $40,000 | $11,250 | $26,250 |
| 2 | 20,000 | 35,000 | 11,250 | 26,250 |
| 3 | 7,000 | 22,000 | 11,250 | 26,250 |
| 4 | 3,000 | 18,000 | 11,250 | 26,250 |
| 5 | 1,250 | 16,250 | 11,250 | 26,250 |
| Total | $56,250 | $131,250 | $56,250 | $131,250 |
Each project requires an investment of $75,000. Straight-line
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
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.
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