Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Average Rate of Return Method, Net Present Value Method, and Analysis for a Service Company The capital investment committee of Touch of Eden Landscaping Company

Average Rate of Return Method, Net Present Value Method, and Analysis for a Service Company

The capital investment committee of Touch of Eden 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 Fixtures
Year Income from Operations Net Cash Flow Income from Operations Net Cash Flow
1 $23,000 $ 35,000 $10,200 $ 22,200
2 20,000 32,000 10,200 22,200
3 12,000 24,000 10,200 22,200
4 (2,000) 10,000 10,200 22,200
5 (2,000) 10,000 10,200 22,200
$51,000 $111,000 $51,000 $111,000

Each project requires an investment of $60,000. 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
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
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 total $ $
Less amount to be invested $ $
Net present value $ $

2. The front end loader has a larger net present value because larger cash flows occur earlier in time compared to the greenhouse fixtures. Thus, if only one of the two projects can be accepted, the front end loader would be the more attractive.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Essentials Of Corporate Fraud

Authors: Tracy L. Coenen

1st Edition

047019412X, 978-0470194126

More Books

Students also viewed these Accounting questions