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 Investment if Selected Residual Value Alpha Very open, like an indoor farmers market $1,472,000 $0.00 Beta Standard grocery shelving and layout, minimal aisle space $6,079,300 $0.00 Gamma Mix of open areas and shelving areas $2,325,760 $0.00 You have calculated 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 below. Proposal Estimated Average Annual Income Estimated Average (after depreciation) Annual Cash Flow Alpha $291,014 $351,145 Beta $291,198 $509,141 Gamma $571,090 $648,654 METHOD COMPARISON Compare methods of capital investment analysis below 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 Does not consider the time value of money Easy to compute Not as easy to compute Directly considers expected cash flows Directly considers timing of expected cash flows Assumes cash flows can be reinvested at minimum desired rate of return Can be used to rank proposals even if project lives are not the same 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 table below, 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 table below. Enter the average rates of return as percentages rounded to two decimal places. Proposal Average Investment Average Rate of Return Accept or Reject? Estimated Average Annual Income Alpha $ $ % Beta $ $ % Gamma $ $ % CASH PAYBACK METHOD Youve decided to confirm your results from the average rate of return by using the cash payback method. Using the table below, calculate 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 $ $ Beta $ $ Gamma $ 4 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. Calculate the net present value of each proposal. You may need the following partial table of factors for present value of an annuity of $1. Enter amounts that represent cash outflows as negative numbers using a minus sign. Round the present value of annual net cash flows to the nearest dollar. Present Value of an Annuity of $1 at Compound Interest (Partial Table) Year 10% 20% 1 0.909 0.833 5 3.791 2.991 10 6.145 4.192 Alpha Beta Gamma Annual net cash flow $ $ $ Times present value factor $ $ $ __________________________________ Equals present value of annual net cash flow $ $ $ Less amount to be invested $ $ $ __________________________________ Equals net present value $ $ $ FINAL QUESTIONS After reviewing all your data, you are ready to answer the questions below. What can you say about each proposal? Proposal Internal Rate of Return Alpha ( = 20%, < 20%, > 20%) Beta (= 20%, <20%, >20 %) Gamma ( = 20%, <20%, > 20%) What can you say about these proposals? Check all that apply. -Gammas proposal is the only proposal that would be acceptable to HomeGrown. -Only Gammas proposal is yielding more than HomeGrowns minimum desired rate of return. -HomeGrown would be breaking even (i.e., profit = 0) if Alphas proposal is chosen. Which proposal is the best choice for HomeGrown given the data collected? -Alpha -Beta -Gamma