Question
he capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are
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he 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 $25,000 $ 40,000 $11,250 $ 26,250 2 20,000 35,000 11,250 26,250 3 7,000 22,000 11,250 26,250 4 3,000 18,000 11,250 26,250 5 1,250 16,250 11,250 26,250 Total $56,250 $131,250 $56,250 $131,250 Each project requires an investment of $75,000. 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 fill in the blank 1% Front-End Loader 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.
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 a brief report for the capital investment committee, advising it on the relative merits of the two investments.
The front-end loader has agreaterlesser
net present value becausegreaterlesser
cash flows occur earlier in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, thefront-end loadergreenhouse
would be the more attractive.
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