6. Average Rate of Return Method

Average Rate of Retum 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: Greenhouse Front-End Looder Operating Net Cash Income Flow Year Operating Income Net Cash Flow 1 $45,600 $150,000 $96,000 2 45,600 150,000 A 3 45,600 45,600 150,000 150,000 $240,000 203,000 143,000 98,000 66,000 73,000 36,000 16,000 7,000 $228,000 4 5 45,600 150,000 Total $228,000 $750,000 $750,000 Each project requires an investment of $480,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 10% for purposes of the net present value analysis Present Value of $1 at Compound Interest 6% 10% 12% 15% 20% Year 1 0.943 0.909 0.833 0.893 0.797 0.870 0.756 2 0.826 0.694 0.890 0.840 3 0.751 0.712 0.658 0.579 US 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 0.194 0.284 0.247 10 0.558 0.386 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 9 Ib. 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 minussion to indicate a negative net present value Front-End Loader Greenhouse Present value of net cash flow Amount to be invested - Net present value eBook Show Me How Print Item 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. If required, round your answer to one decimal place. Average Rate of Return Front-End Loader 9 % Greenhouse 1b. Compute the not present value for each investment. Use the present value of $1 table above. If required, round to the nearest doltar. If required, use the minus sign to indicate a negative net present value. Front End Loader Greenhouse