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11:40 1 v2.cengagenow.com Chapter 26 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 Operating Net Cash Operating Net Cash Year Income Flow Income Flow $34,200 $110,000 $72,000 $176,000 34,200 10,000 55,000 149,000 W N 34,200 110,000 27,000 105,000 34,200 110,000 12,000 72,00 un A 34,200 1 10,000 5,000 48,000 Total $171,000 $550,000 $171,000 $550,000 Each project requires an investment of $380,000. 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% 100 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 .797 .756 0.694 3 0.840 0.751 0.712 .658 0.579 4 0.792 0.683 0.636 0.572 .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, 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 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 in time - ad to the annanhaving There if only and of tha tin non Check My Work Next Assignment Score: 36.36% Email Instructor Save and Exit Submit Assignment for Grading 211240 1 .III '4? E} G) v2.cengagenow.com [I] Chapter 26 ' ,' The capital investment committee of Arches Landscaping Company is considering two (9 capital investments. The estimated operating income and net cash flows from each investment are as follows: Front-End Loader Greenhouse Operating Net Cash Operating Net Cash Year Income Flow Income Flow 1 $34,200 $110,000 $72,000 $176,000 2 34,200 110,000 55,000 149,000 3 34,200 110,000 27,000 105,000 4 34,200 110,000 12,000 72,000 5 34,200 110,000 5,000 48,000 a Total $171,000 $550,000 $171,000 $550,000 Each project requires an investment of $380,000. Straightline 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% 11% 15% 20% 1 0.943 0.909 0.393 0.870 0.833 2 0.390 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.650 0.579 4 0.792 0.603 0.636 0.572 0.452 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 3 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.550 0.306 0.322 0.247 0.162 Required: la. Compute the average rate of return for each investment. If required, round your answer to one decimal place. Average Rate 0' Return 1b. Compute the net present value for each investment. Use the present value of $1 Front-E d Loader \"/0 Greenhouse ' 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 s 5; Amount to be invested Net present value S:] $ 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. Anlgmnent Score: 36.16% Email lnsh uum
