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 Net Cash Flow Year Net Cash Flow $307,000 1 Operating Income 561,600 61,600 61,600 61,600 2 Operating Income $129,000 99,000 49,000 22,000 9,000 5192,000 192,000 192,000 192,000 192,000 $960,000 3 259,000 182,000 125,000 87,000 4 5 61,600 Total $308,000 $308,000 $960,000 Each project requires an investment of $560,000. 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 69 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 0.63 0.636 0.572 0.482 5 0.747 0.62 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.457 0376 0.279 Check My Work Next > Allwave Save and Exit Submit Assignment for Grading eBook Show Me How PrOS E VIVE E ponuerest 6% 10% 12% 15% 20% Year 0.322 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 0.247 0.162 Required: 1a. Compute the average rate of return for each investment. It required, round your answer to one decimal place. Average Rate of Return Front-End Loader 22 Greenhouse 22 1b. Compute the net present value for each Investment. Use the present value of $1 table above. It 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 745,321 X Amount to be invested -560,000 -560,000 Net present value 144,940 X 185,321 x Next > Check My Work Required: la. 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 22 1b. Compute the net present value for each Investment. Use the present value of $1 table above. It 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 745,321 X Amount to be invested -560,000 -560,000 Net present value 144,940 X 185,321 X 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. Free Check My Wor a. Divide the estimated average annual income by the average Investment 1b. For each investment, multiply the present value factor for each year (Exhibit 2) by that year's net cash flow. Subtract the amount to be invested from the total present value of the not Cath tow. Which inwont offers the more favorable not present value? 2. Consider when cash flows are received and the time value of money Next > Check My Work All work saved Save and Submit Assignment for Grading
