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eBook Show Me How Question Content Area Average Rate of Return Method, Net Present Value Method, and Analysis for a service company The capital investment

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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 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 $52,800 $162,000 $111,000 $259,000
2 52,800 162,000 84,000 219,000
3 52,800 162,000 42,000 154,000
4 52,800 162,000 18,000 105,000
5 52,800 162,000 9,000 73,000
Total $264,000 $810,000 $264,000 $810,000

Each project requires an investment of $480,000. 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, 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

2. Prepare brief report for the capital investment committee, advising it on the relative merits of the two investments.

The front-end loader has a

smallerlarger

net present value because cash flows occur

earlierlater

in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the

front-end loadergreenhouse

would be the more attractive.

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