1 2 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 income from operations and net cash flows from each investment are as follows: Front-End Loader Greenhouse Income from Net Cash Income from Net Cash Year Operations Flow Operations Flow $25,000 $ 40,000 $11,250 $ 26,250 20,000 35,000 11,250 26,250 7,000 22,000 11,250 26,250 3,000 18,000 11,250 26,250 1,250 16,250 11,250 26,250 $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. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 3 4 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 eBook Show Me How Calculator 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.402 0.567 0.507 0.497 0.432 6 0.705 0.335 0.564 0.513 7 0.665 0.452 0.376 0.279 B 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 Greenhouse Front-End Loader 1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, round to the nearest dollar. Frent-End Loader Greenhouse Present value of net cash flow Amount to be invested Net present value 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments The fish 1 Cash Payback Period, Net Present Value Method, and Analysis Elite Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows: Year Plant Expansion Retail Store Expansion $ 450,000 $ 500,000 2 450,000 400,000 3 340,000 350,000 4 280,000 250,000 5 180,000 200,000 Total $1,700,000 $1,700,000 Each project requires an investment of $900,000. A rate of 15% has been selected for the net present value analysis. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.870 0.833 0.893 0.797 2 0.890 0.826 0.756 0.694 3 0.840 0.751 0.658 0.579 0.712 0.636 4 0.792 0.683 0.482 0.572 0.497 5 0.747 0.621 0.567 0.402 6 0.705 0.507 0.432 0.335 0.564 0.513 7 0.665 0.452 0.376 0.279 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 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 cash payback period for each project. Cash Payback Period Plant Expansion Retail Store Expansion 1b. Compute the net present value. Use the present value of $1 table above. If required, round to the nearest dollar. Plant Expansion Retail Store Expansion Present value of net cash flow total Less amount to be invested Net present value 2. Because of the timing of the receipt of the net cash flows, the offers a higher