Mastery Problem: Capital Investment Analysis Homegrown 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 Mke 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 shell 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 Home Grown, you are responsible for deciding which if any of the proposals to accept. HomeGrown's minimum acceptable rate of retum is 20%. You receive the following data from the three contractors: Initial Cost Residual Proposal 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 Garma Mix of open areas and shelving areas 2,125,560 0.00 You have computed estimates of annual cash rows and average annual income from customers for each of the three contractors plans. You believe that the annual cash hows will be equal for each of the 10 years for which you are preparing your capital investment analysis. Your condusions are presented in the following table. Estimated Average Annual Income Estimated Average Proposal (after depreciation) Annual Cash Flow Alpha $291,014 3351,145 Bete 272,019 475,608 Gamme 527,245 598,133 Method Comparison 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 Cash Payback Net Present Internal Rate of Return Method Method Value Method 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 nows can be reinvested at minimum desired rate of return No No Yes Yes Can be used to rank proposals even if project lives are not the same Yes Yes No Yes Cc Work Review the advantages and disadvantages of each method. 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 Aipha, 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 Average Average Rate Accept or Estimated Average Annual Income Average Investment Average Rate of Return Accept or Reject Proposal % Alpha Beta Gamma Feedback Check My Work Review the definition of average rate of return, and plug the relevant numbers into the formula from the data given