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:

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 Operations $25,000 20,000 7,000 3,000 1,250 $56,250 Net Cash Net Cash Income from Operations $11,250 11,250 11,250 11,250 11,250 $56,250 Flow Flow Year 40,000 35,000 22,000 18,000 16,250 $131,250 $ 26,250 26,250 26,250 26,250 26,250 $131,250 4 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 10% 0.909 0.826 0.751 0.683 0.621 0.564 0.507 0.513 0.467 0.404 0.424 0.386 2090 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 Year 6% 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 12% 0.893 0.797 0.712 0.636 0.567 15% 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 2 4 0.452 9 10 Required: 0.361 0.322 1a. Compute the average rate of return for each investment, If required, round your answer to one decimal place Required: 1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place. Average Rate of Return Greenhouse Front-End Loader 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 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 the greenhouse. Thus, if only one of the two projects can be accepted, the net present value because cash flows occur earlier in time compared to would be the more attractive