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:

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:

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

You begin by trying to eliminate any proposals that are not yielding the companys 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. Table below:

Cash Payback Method

Youve 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. Table below:

Net Present Value

Even though youre fairly certain that your evaluation and elimination is correct, you would like to compare the three proposals using the net present value method, and get some data about the internal rate of return of the proposals, each of which are expected to generate their respective annual net cash inflows for a period of 10 years.

Compute the net present value of each proposal. You may need the following partial table of factors for present value of an annuity of $1. Round the present value of annual net cash flows to the nearest dollar. If your answer is zero enter "0". For the net present value, if required, use the minus sign (-) to indicate a negative amount. Table below:

Proposal Estimated Average Annual Income (after depreciation) $302,054 Estimated Average Annual Cash Flow $351,145 Alpha Beta 272,019 521,931 461,411 598,133 Gamma Estimated Average Annual Income Average Investment Average Rate of Return Proposal Accept or Reject Accept Alpha S 302,054 1,472,000 X 20.52 X % Beta 272,019 5,678,900 X 4.79 X Reject Gamma 521,931 2,125,560 X 24.55 X Accept Annual Net Cash Inflow Cash Payback Period in Years Proposal Initial Cost Alpha 1,472,000 $ 351,145 4.19 X Beta 5,678,900 461,411 12.31 X Gamma 2,125,560 598,133 3.55 Present Value of an Annuity of $1 at Compound Interest (Partial Table) Year 10% 20% 0.909 0.833 1 5 3.791 2.991 10 6.145 4.192 Alpha Beta Gamma Annual net cash flow 351,145 461,411 $ 598,133 Present value factor 4,192 X 4,192 X 4,192 X Present value of annual net cash flows $ 1,472,000 $ 1,934, 235 $ 2,507,373 x Amount to be invested 1,472,000 5,678,900 2,125,560 Net present value 0 $ -3,744,655 X $ 381,813 x