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.