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 |
$45,600 |
|
$149,000 |
|
|
$96,000 |
|
$238,000 |
|
2 |
45,600 |
|
149,000 |
|
|
73,000 |
|
201,000 |
|
3 |
45,600 |
|
149,000 |
|
|
36,000 |
|
142,000 |
|
4 |
45,600 |
|
149,000 |
|
|
16,000 |
|
97,000 |
|
5 |
45,600 |
|
149,000 |
|
|
7,000 |
|
67,000 |
|
Total |
$228,000 |
|
$745,000 |
|
|
$228,000 |
|
$745,000 |
|
Each project requires an investment of $480,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% 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
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.