Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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
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 Operating Net Cash Income Flow Greenhouse Operating Net Cash Income Flow Year $160,000 $32,400 32,400 $100,000 100,000 100,000 $68,000 52,000 N- 135,000 32,400 26,000 95,000 100,000 11,000 65,000 32,400 32,400 $162,000 100,000 5,000 45,000 Total $500,000 $162,000 $500,000 Each project requires an investment of $360,000. 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 0.751 0658 0.579 0.840 0.792 0.747 0.683 0.712 0.636 0.567 0.572 0.482 0.621 0.497 0.402 0.705 0.564 0.507 0.432 0.335 0.665 0.513 0.376 0.279 0.452 0.404 8 0627 0,467 0.327 0.233 0.592 0.424 0.361 0.284 0.194 100.558 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 Greenhouse 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 Amount to be invested Net present value 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 Greenhouse 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 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 net present value because cash flows occur if only one of the two projects can be accepted, the would be the more attractive, in time compared to the greenhouse Thus
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started