1. Question Content Area

   Average Rate of Return Method, Net Present Value Method, and Analysis for a service company

   The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows:

   	Front-End Loader					Greenhouse
   Year	Operating Income		Net Cash Flow			Operating Income		Net Cash Flow
   1	$41,800		$131,000			$88,000		$210,000
   2	41,800		131,000			67,000		177,000
   3	41,800		131,000			33,000		124,000
   4	41,800		131,000			15,000		85,000
   5	41,800		131,000			6,000		59,000
   Total	$209,000		$655,000			$209,000		$655,000

   Each project requires an investment of $440,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis.

   Present Value of $1 at Compound Interest
   Year	6%	10%	12%	15%	20%
   1	0.943	0.909	0.893	0.870	0.833
   2	0.890	0.826	0.797	0.756	0.694
   3	0.840	0.751	0.712	0.658	0.579
   4	0.792	0.683	0.636	0.572	0.482
   5	0.747	0.621	0.567	0.497	0.402
   6	0.705	0.564	0.507	0.432	0.335
   7	0.665	0.513	0.452	0.376	0.279
   8	0.627	0.467	0.404	0.327	0.233
   9	0.592	0.424	0.361	0.284	0.194
   10	0.558	0.386	0.322	0.247	0.162

   Required:

   1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place.

   	Average Rate of Return
   Front-End Loader	fill in the blank 1%
   Greenhouse	fill in the blank 2%

   1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.

   	Front-End Loader	Greenhouse
   Present value of net cash flow	$fill in the blank 3	$fill in the blank 4
   Amount to be invested	fill in the blank 5	fill in the blank 6
   Net present value	$fill in the blank 7	$fill in the blank 8

   2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.

   The front-end loader has a

   smallerlarger

   net present value because cash flows occur

   earlierlater

   in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the

   front-end loadergreenhouse

   would be the more attractive.