Question

The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated income...

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

Front-End Loader Greenhouse
Year Income from
Operations
Net Cash
Flow
Income from
Operations
Net Cash
Flow
1 $57,200 $187,000 $120,000 $299,000
2 57,200 187,000 92,000 252,000
3 57,200 187,000 46,000 178,000
4 57,200 187,000 20,000 122,000
5 57,200 187,000 8,000 84,000
Total $286,000 $935,000 $286,000 $935,000

Each project requires an investment of $520,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 10% 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 %
Greenhouse %

1b. Compute the net present value for each investment. Use the present value of $1 table above. 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 $ $
Net present value $ $

Homework Answers

Answer #1

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 57200/260000 = 22%
Greenhouse 22%

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

Front-End Loader Greenhouse
Present value of net cash flow $187000*2.79 = 708730 $749111
Amount to be invested $-520000 $-520000
Net present value $188730 $229111
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