HomeGrown Company

HomeGrown Company is a chain of grocery stores that are similar to indoor farmer's markets, providing fresh, local produce, meats, and dairy products to consumers in urban areas. HomeGrown is considering opening several stores in a new city, and has proposals from three contractors $($Alpha$,$ Beta, and Gamma companies$)$ who would like to provide buildings for the new stores.

The amount of expected revenue from the stores will depend on the design of the contractor. For example, if HomeGrown decides on a more open floor plan, with less shelf space for products, revenue would be lower overall. However, if HomeGrown decides on a very crowded floor plan, it may lose customers who appreciate a more open feel.

As the project manager for HomeGrown, you are responsible for deciding which if any of the proposals to accept. HomeGrown's minimum acceptable rate of return is $20\%.$ You receive the following data from the three contractors:

Proposal Type of Floor Plan Initial Cost

if Selected Residual

Value

Alpha Very open, like an indoor farmer$$s market $$1,472,000$ $$0\mathrm{.}00$

Beta Standard grocery shelving and layout, minimal aisle space $5,678,9000\mathrm{.}00$

Gamma Mix of open areas and shelving areas $2,125,5600\mathrm{.}00$

You have computed estimates of annual cash flows and average annual income from customers for each of the three contractors' plans. You believe that the annual cash flows will be equal for each of the $10$ years for which you are preparing your capital investment analysis. Your conclusions are presented in the following table.

Proposal Estimated Average

Annual Income

$($after depreciation$)$

Estimated Average

Annual Cash Flow

Alpha $$302,054$ $$351,145$

Beta $272,019475,608$

Gamma $521,931592,819$

Method Comparison

Compare methods of capital investment analysis in the following table to begin your evaluation of the three capital investment proposals Alpha, Beta, and Gamma. You decide to compare four methods: the average rate of return, cash payback period, net present value, and internal rate of return methods.

Average Rate of

Return Method Cash Payback

Method Net Present

Value Method Internal Rate of

Return Method

Considers the time value of money

No

No

Yes

Yes

Does not consider the time value of money

Yes

Yes

No

No

Easy to compute

Yes

Yes

No

No

Not as easy to compute

No

No

Yes

Yes

Directly considers expected cash flows

No

Yes

Yes

Yes

Directly considers timing of expected cash flows

No

No

Yes

Yes

Assumes cash flows can be reinvested at minimum desired rate of return

No

Incorrect

No

Yes

Yes

Can be used to rank proposals even if project lives are not the same

Yes

Yes

No

Yes

Feedback Area

Feedback

Review the advantages and disadvantages of each method.

Question Content Area

Average Rate of Return

You begin by trying to eliminate any proposals that are not yielding the company$$s minimum required rate of return of $20\%.$ Complete the following table, and decide whether Alpha, Beta, and$/$or Gamma should be eliminated because the average rate of return of their project is less than the company's minimum required rate of return.

Complete the following table. Enter the average rates of return as percentages rounded to two decimal places.

Proposal Estimated Average

Annual Income Average

Investment Average Rate

of Return Accept or

Reject

Alpha $fill in the blank $2$ec$4$c$2052$f$86034\_1$

$fill in the blank $2$ec$4$c$2052$f$86034\_2$

fill in the blank $2$ec$4$c$2052$f$86034\_3$

$\%$

Accept

Beta fill in the blank $2$ec$4$c$2052$f$86034\_5$

fill in the blank $2$ec$4$c$2052$f$86034\_6$

fill in the blank $2$ec$4$c$2052$f$86034\_7$

Reject

Gamma fill in the blank $2$ec$4$c$2052$f$86034\_9$

fill in the blank $2$ec$4$c$2052$f$86034\_10$

fill in the blank $2$ec$4$c$2052$f$86034\_11$

Accept

Feedback Area

Feedback

Review the definition of average rate of return, and plug the relevant numbers into the formula from the data given.

Question Content Area

Cash Payback Method

You$$ve decided to confirm your results from the average rate of return by using the cash payback method.

Using the following table, compute the cash payback period of each investment. If required, round the number of years in the cash payback period to a whole number.

Proposal

Initial Cost Annual Net

Cash Inflow Cash Payback

Period in Years

Alpha $fill in the blank $27$c$6$a$7077$fb$3062\_1$

$fill in the blank $27$c$6$a$7077$fb$3062\_2$

fill in the blank $27$c$6$a$7077$fb$3062\_3$

Beta fill in the blank $27$c$6$a$7077$fb$3062\_4$

fill in the blank $27$c$6$a$7077$fb$3062\_5$

fill in the blank $27$c$6$a$7077$fb$3062\_6$

Gamma fill in the blank $27$c$6$a$7077$fb$3062\_7$

fill in the blank $27$c$6$a$7077$fb$3062\_8$

fill in the blank $27$c$6$a$7077$fb$3062\_9$

Feedback Area

Feedback

Review the definition of cash payback period, and put the relevant numbers into the formula from the data given.

Question Content Area

Net Present Value

Eve