Chapter 26 Homework 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 operating income and net cash flows from each investment are as follows: Front-End Loader Greenhouse Operating Net Cash Operating Net Cash Year Income Flow Income Flow 1 $59,400 $ 194,000 $125,000 $310,000 59,400 194,000 95,000 262,000 3 59,400 194,000 48,000 184,000 59,400 194,000 21,000 126,000 5 59,400 194,000 8,000 88,000 Total $297,000 $970,000 $297,000 $970,000 2. 3 4 > 5 Each project requires an investment of $540,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis. Present Value of $1 at Compound Interest 20% 15% Year 6% 10% 12% 1 0.909 0.870 0.943 0.893 0.833 0.826 0.797 0.756 2 0.890 0.694 Chapter 26 Homework Each project requires an investment of $540,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis. Present Value of $1 at Compound Interest Year 6% 10% 12% 20% 15% 1 0.909 0.870 0.943 0.893 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 0.402 0.621 0.567 0.497 0.705 6 0.564 0.507 0.432 0.335 0.665 7 0.513 0.452 0.376 0.279 0.627 0.467 0.404 0.327 0.233 00 0.592 0.424 9 0.361 0.284 0.194 10 0.386 0.247 0.558 0.322 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 % Front-End Loader Greenhouse % 1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value. Front-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 front-end loader has a net present value because cash flows occur in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the would be the more attractive