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 HomeGrown decides on a very crowded floor plan, it may lose customers who appreciate a more open feel. As the project manager for Home Grown, 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 Initial Cost Residual Type of Floor Plan if Selected Value Alpha Very open, like an indoor farmer's market $1,472,000 $0.00 Beta Standard grocery shelving and layout, minimal aisle space 5,678,900 0.00 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 Average Annual Income (after depreciation) Estimated Average Annual Cash Flow Proposal Alpha Beta 5291,014 272,019 527,245 $351,145 475,608 592,819 Gamma 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 retur, cash payback period, net present value, and internal rate of return methods Average Rate of Cash Payback Net Present Internal Rate of 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. Estimated Average Annual Income Average Investment Average Rate of Return Proposal Accept or Reject 5 Alpha 291014 351,145 X Accept Reject Beta Accept Gamma Feedback Check My Work h inha tha formula from the data giyen 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 51. Round the present value of annual 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 Present Value of an Annuity of $1 at Compound Interest (Partial Table) Year 10% 20% 0.833 0.909 3.791 6.145 2.991 4.192 10 Gamma Alpha Annual net cash flow Present value factor Present value of annual net cash flows Amount to be invested Net present value 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 humbers into the blanks from the data glven, making the indicated computations