Mastery Problem: Capital Investment Analysis Home Grown Company Home Grown 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. Home Grown 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 Home Grown 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 Residual if Selected Value Alpha Very open, like an indoor farmer's market $1,472,000 $0.00 Standard grocery shelving and layout, Beta 5,678,900 0.00 minimal aisle space Gamma Mix of open areas and shelving areas 2,125,560 0.00 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. Estimated Estimated Average Annual Income (after depreciation) Average Annual Cash Proposal Flow Alpha $351,145 $291,014 272,019 Beta 475,608 598,133 Gamma 521,931 Net Present Value Even though you're 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 "O". For the net present value, if required, use the minus sign (-) to indicate a negative amount. 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 351,145 $ 475,608 $ 598,133 Present value factor 2.096 5.970 1.777 Present value of annual net cash flows $ $ $ Amount to be invested Net present value $1 Feedback Check My Work Review the use of the present value of an annuity tables to select the appropriate present value factor. Then put the relevant numbers into the blanks from the data given, making the indicated computations