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 Year Operating Income Net Cash Flow Operating Income Net Cash Flow 1 $51,300 $165,000 $108,000 $264,000 2 51,300 165,000 82,000 223,000 3 51,300 165,000 41,000 157,000 4 51,300 165,000 18,000 107,000 5 51,300 165,000 7,500 74,000 Total $256,500 $825,000 $256,500 $825,000 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 10% 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 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 0.284 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 fill in the blank 1 % Greenhouse fill in the blank 2 %

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 $ fill in the blank 3 $ fill in the blank 4 Amount to be invested fill in the blank 5 fill in the blank 6 Net present value $ fill in the blank 7 $ fill in the blank 8

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 greenhouse would be the more attractive.