Question
The capital investment committee of Iguana Inc. is considering two capital investments. The estimated operating income and net cash flows from each investment are as
The capital investment committee of Iguana Inc. is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows:
Year | Robotic Assembler Operating Income | Robotic Assembler Net Cash Flow | Warehouse Operating Income | Warehouse Net Cash Flow |
---|---|---|---|---|
1 | $59,400 | $184,000 | $125,000 | $294,000 |
2 | 59,400 | 184,000 | 95,000 | 248,000 |
3 | 59,400 | 184,000 | 48,000 | 175,000 |
4 | 59,400 | 184,000 | 21,000 | 120,000 |
5 | 59,400 | 184,000 | 8,000 | 83,000 |
Total | $297,000 | $920,000 | $297,000 | $920,000 |
Each project requires an investment of $540,000. 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 | 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.
Investment Committee | Average Rate of Return |
---|---|
Robotic Assembler | % |
Warehouse | % |
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.
Line Item Description | Robotic Assembler | Warehouse |
---|---|---|
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 robotic assembler has a fill in the blank 1 of 3
smallerlargersmaller
net present value because cash flows occur fill in the blank 2 of 3
earlierlaterlater
in time compared to the warehouse. Thus, if only one of the two projects can be accepted, the fill in the blank 31 of 3
robotic assemblerwarehousewarehouse
would be the more attractive.
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