Average Rate of Return Method, Net Present Value Method, and Analysis

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

Net Present Value Method

The following data are accumulated by Lingle Company in evaluating the purchase of $180,000 of equipment having a 4-year useful life:

		Net Income		Net Cash Flow
Year 1		$51,000		$96,000
Year 2		33,000		78,000
Year 3		15,000		60,000
Year 4		3,000		48,000

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
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
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

a. Assuming that the desired rate of return is 15%, determine the net present value for the proposal. (If required, round to the nearest dollar.) Use the table of the present value of $1 presented above.

Present value of net cash flow	$fill in the blank 1
Amount to be invested	$fill in the blank 2
Net present value	$fill in the blank 3

b. Would management be likely to look with favor on the proposal? The net present value indicates that the return on the proposal is than the minimum desired rate of return of 15%.

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%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
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
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.

	Average Rate of Return
Greenhouse	fill in the blank 1%
Front End Loader	fill in the blank 2%

1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, round to the nearest dollar.

	Front End Loader	Greenhouse Fixtures
Present value of net cash flow total	$fill in the blank 3	$fill in the blank 4
Less 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. The front end loader has a net present value because cash flows occur earlier in time compared to the greenhouse fixtures. Thus, if only one of the two projects can be accepted, the would be the more attractive.