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 | $ | $ |
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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