Mastery Problem: Capital Investment Analysis HomeGrown Company HomeGrown Company is a chain of grocery stores that are similar to indoor farmer's markets, providing fresh, local
Mastery Problem: Capital Investment Analysis
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:
| Proposal | Type of Floor Plan | Initial Cost 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 | 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.
| Proposal | Estimated Average Annual Income (after depreciation) | Estimated Average Annual Cash Flow |
| Alpha | $313,094 | $351,145 |
| Beta | 272,019 | 475,608 |
| Gamma | 521,931 | 598,133 |
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 Home Grown 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. Home Grown's minimum acceptable rate of return is 20%. You receive the following data from the three contractors: Residual Proposal Type of Floor Plan Initial Cost if Selected Value Alpha Very open, like an indoor farmer's market $1,472,000 $0.00 Beta 5,678,900 0.00 Standard grocery shelving and layout, minimal aisle space Mix of open areas and shelving areas Gamma 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 $313,094 $351,145 Beta 272,019 475,608 Gamma 521,931 598,133 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 Accept or Reject Proposal Alpha $ 736,000 X % Accept Beta 272,019 2,839,450 9.58 Reject Gamma 521,931 1,062,7807 49.11 Accept 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 $1 $1 Present value factor Present value of annual net cash flows $ Amount to be invested Net present value $1
