A method of evaluating capital investment proposals that focuses on the expected profitability of the investment 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 Income from Net Cash Net Cash Year Flow Operations Flow Operations $39,900 $120,000 $84,000 $192,000 39,900 120,000 64,000 162,000 2 39,900 120,000 32,000 114,000 120,000 78,000 4 39,900 14,000 39,900 120,000 5,500 54,000 $199,500 $600,000 $199,500 $600,000 Total Each project requires an investment of $420,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 1096 for purposes of the net present value analysis. Present Value of $1 at Compound Interest 10% 12% Year 6% 1 5% 20% 0.943 0.909 0.893 0.870 0.833 0.694 0.890 0.826 0.797 0.756 Present Value of $1 at Compound Interest 10% 20% 15% Year 696 1296 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.7970.756 0.694 0.579 0.840 0.751 0.712 0.658 4 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.335 0.705 0.564 0.507 0.432 0.665 0.513 0.452 0.376 0.279 0.627 0.467 0.4040.327 0.233 0.284 0.592 0.424 0.361 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 30 % Front-End Loader 30 X % Greenhouse 1b. 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 10 0.558 0.247 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 30 X % Front-End Loader 30 X % Greenhouse 1b. 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 99,941X 94,631X Present value of net cash flow 75,000 X 75,000 X Amount to be invested 19,631X 24,941X 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 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 greenhousewould be the more attractive. Feedback Check My Work Next Check My Work
