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.