Chapter 25 Question one

Question 2

The capital investment committee of Arches 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
Year	Income from Operations		Net Cash Flow			Income from Operations		Net Cash Flow
1	$39,900		$125,000			$84,000		$200,000
2	39,900		125,000			64,000		169,000
3	39,900		125,000			32,000		119,000
4	39,900		125,000			14,000		81,000
5	39,900		125,000			5,500		56,000
Total	$199,500		$625,000			$199,500		$625,000

Each project requires an investment of $420,000. 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
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	%
Greenhouse	%

1b. Compute the net present value for each investment. Use the present value of $1 table above. 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 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.

Question 3

The expected average rate of return for a proposed investment of $602,000 in a fixed asset with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total net income of $321,680 for the 4 years is (round to two decimal points)

a.0.53%

b.26.72%

c.13.36%

d.1.07%

Average Rate of Return, Cash Payback period, Net Present Value Method for a Service Company Spanish Peaks Railroad Inc. is considering acquiring equipment at a cost of $185,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $37,000. The company's minimum desired rate of return for net present value analysis is 12%. Present Value of an Annuity of $1 at Compound Interest Year 6% 0.943 2 1.833 3 2.673 3.465 4.212 4.917 5.582 8 6.210 6.802 107.360 10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 12% 15% 20% 0.893 0.870 0.833 1.690 1.626 1.528 2.402 2.283 2.106 3.037 2.855 2.589 3.605 3.353 2.991 4.111 3.785 3.326 4.564 4.160 3.605 4.968 4.487 3.837 5.328 4.772 4.031 5.6505.0194.192 Compute the following: a. The average rate of return, giving effect to straight-line depreciation on the investment. If required, round your answer to one decimal place. b. The cash payback period. 5 years C. The net present value. Use the above table of the present value of an annuity of $1. Round to the nearest dollar. If required, use a minus sign to indicate negative net present value for current grading purpose. Present value of annual net cash flows Amount to be invested Net present value