Average Rate of Return Method, Net Present Value Method, and Analysis for a service company

Present Value of $$1$ at Compound Interest

Required:

$1$a$.$ Compute the average rate of return for each investment. If required, round your answer to one decimal place.

Average Rate of Return

$1$b$.$ Compute the net present value for each investment. Use the present value of $$1$ table above. If required, use the minus sign to indicate a negative net present value.

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

greenhouse $$ would be the more attractive.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

Year Income from

Operations Net Cash

Flow Income from

Operations Net Cash

Flow

$1$ $$54,600$ $$170,000$ $$115,000$ $$272,000$

$254,600170,00087,000230,000$

$354,600170,00044,000162,000$

$454,600170,00019,000111,000$

$554,600170,0008,00075,000$

Total $$273,000$ $$850,000$ $$273,000$ $$850,000$

Each project requires an investment of $$520,000.$ 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 $6\%10\%12\%15\%20\%$

$10\mathrm{.}9430\mathrm{.}9090\mathrm{.}8930\mathrm{.}8700\mathrm{.}833$

$20\mathrm{.}8900\mathrm{.}8260\mathrm{.}7970\mathrm{.}7560\mathrm{.}694$

$30\mathrm{.}8400\mathrm{.}7510\mathrm{.}7120\mathrm{.}6580\mathrm{.}579$

$40\mathrm{.}7920\mathrm{.}6830\mathrm{.}6360\mathrm{.}5720\mathrm{.}482$

$50\mathrm{.}7470\mathrm{.}6210\mathrm{.}5670\mathrm{.}4970\mathrm{.}402$

$60\mathrm{.}7050\mathrm{.}5640\mathrm{.}5070\mathrm{.}4320\mathrm{.}335$

$70\mathrm{.}6650\mathrm{.}5130\mathrm{.}4520\mathrm{.}3760\mathrm{.}279$

$80\mathrm{.}6270\mathrm{.}4670\mathrm{.}4040\mathrm{.}3270\mathrm{.}233$

$90\mathrm{.}5920\mathrm{.}4240\mathrm{.}3610\mathrm{.}2840\mathrm{.}194$

$100\mathrm{.}5580\mathrm{.}3860\mathrm{.}3220\mathrm{.}2470\mathrm{.}162$

Required:

$1$a$.$ Compute the average rate of return for each investment. If required, round your answer to one decimal place.

Average Rate of Return

Front$-$End Loader fill in the blank $1$

$\%$

Greenhouse fill in the blank $2$

$\%$

$1$b$.$ Compute the net present value for each investment. Use the present value of $$1$ table above. If required, use the minus sign to indicate a negative net present value.

Front$-$End Loader Greenhouse

Present value of net cash flow $fill in the blank $3$

$fill in the blank $4$

Amount to be invested $fill in the blank $5$

$fill in the blank $6$

Net present value $fill in the blank $7$

$fill in the blank $8$

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

The front$-$end loader has a

smaller

net present value because cash flows occur

later

in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the

greenhouse

would be the more attractive.