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Average Rate of Return Method, Net Present Value Method, and Analysis for a Service Company The capital investment committee of Arches Landscaping Company is
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 $25,000 $40,000 $11,250 $26,250 2 20,000 35,000 11,250 26,250 3 7,000 22,000 11,250 26,250 3,000 18,000 11,250 26,250 1,250 16,250 11,250 26,250 Total $56,250 $131,250 $56,250 $131,250 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
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