Ch 26 Problem Set

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1. 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	$44,000		$139,000			$92,000		$222,000
   2	44,000		139,000			70,000		188,000
   3	44,000		139,000			35,000		132,000
   4	44,000		139,000			15,000		90,000
   5	44,000		139,000			8,000		63,000
   Total	$220,000		$695,000			$220,000		$695,000

   Each project requires an investment of $400,000. 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
   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