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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
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 Operating Net Cash Operating Net Cash Year Income Flow Income Flow 1 566,000 $211,000 $139,000 $338,000 2 66,000 211,000 106,000 285,000 3 66,000 211,000 53,000 200,000 4 66,000 211,000 23,000 137,000 5 66,000 211,000 9,000 95,000 Total $330,000 $1,055,000 $330.000 $1,055,000 Each project requires an investment of $600,000. 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. Year Present Value of $1 at Compound Interest 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 1 2 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 0.404 0.327 0.233 0.467 0.424 9 0.592 0.361 0.284 0.194 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 22 % Greenhouse 22 % 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 Amount to be invested E Net present value s 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 net present value because cash flows occur in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the would be the more attractive
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