HomeGrown Company is a chain of grocery stores that are similar to indoor farmer's markets, providing fresh, local produce, meats, and dairy products to consumers in urban areas. HomeGrown is considering opening several stores in a new city, and has proposals from three contractors (Alpha, Beta, and Gamma companies) who would like to provide buildings for the new stores.
The amount of expected revenue from the stores will depend on the design of the contractor. For example, if HomeGrown decides on a more open floor plan, with less shelf space for products, revenue would be lower overall. However, if HomeGrown decides on a very crowded floor plan, it may lose customers who appreciate a more open feel.
As the project manager for HomeGrown, you are responsible for deciding which if any of the proposals to accept. HomeGrown's minimum acceptable rate of return is 20%. You receive the following data from the three contractors:
Proposal  Type of Floor Plan  Investment if Selected  Residual Value 

Alpha  Very open, like an indoor farmer’s market  $1,472,000  $0.00 
Beta  Standard grocery shelving and layout, minimal aisle space  5,678,900  0.00 
Gamma  Mix of open areas and shelving areas  2,525,960  0.00 
You have computed estimates of annual cash flows and average annual income from customers for each of the three contractors' plans. You believe that the annual cash flows will be equal for each of the 10 years for which you are preparing your capital investment analysis. Your conclusions are presented in the following table.
Proposal  Estimated Average  

Annual Income  Estimated Average  
(after depreciation)  Annual Cash Flow  
Alpha  $313,094  $351,145 
Beta  272,019  461,411 
Gamma  620,249  717,120 
You begin by trying to eliminate any proposals that are not yielding the company’s minimum required rate of return of 20%. Complete the following table, and decide whether Alpha, Beta, and/or Gamma should be eliminated because the average rate of return of their project is less than the company's minimum required rate of return.
Complete the following table. Enter the average rates of return as percentages rounded to two decimal places.
Proposal  Average Investment  Average Rate of Return  Accept or Reject?  

Estimated Average  
Annual Income  
Alpha  
Beta  
Gamma 

You’ve decided to confirm your results from the average rate of return by using the cash payback method.
Using the following table, compute the cash payback period of each investment. If required, round the number of years in the cash payback period to a whole number.
Proposal  Initial Cost  Annual Net Cash Inflow  Cash Payback Period in Years 

Alpha  
Beta  
Gamma 
Even though you’re fairly certain that your evaluation and elimination is correct, you would like to compare the three proposals using the net present value method, and get some data about the internal rate of return of the proposals, each of which are expected to generate their respective annual net cash inflows for a period of 10 years.
Compute the net present value of each proposal. You may need the following partial table of factors for present value of an annuity of $1. Enter amounts that represent cash outflows as negative numbers using a minus sign. Round the present value of annual net cash flows to the nearest dollar.
Present Value of an Annuity of $1 at Compound Interest (Partial Table) 


Year  10%  20% 
1  0.909  0.833 
5  3.791  2.991 
10  6.145  4.192 
Alpha  Beta  Gamma  
Annual net cash flow  
Present value factor  
Present value of annual net cash flows  
Amount to be invested  
Net present value 
Average rate of return = Average annual income/ Average investment
Proposal  Average annual income  Average investment  Average rate of return  Accept or reject 
Alfa  $313,094  $1,472,000  21.27%  Accept 
Beta  $272,019  $5,678,900  4.79%  Reject 
Gamma  $620,249  $2,525,960  24.55%  Accept 
Cash pay back period in years = Initial cost/Annual net cash inflow
Proposal  Initial cost  Annual net cash inflow  Cash pay back period in years 
Alpha  $1,472,000  $351,145  1,472,000/351,145 = 4.19 
Beta  $5,678,900  $461,411  5,678,900/461,411 = 12.31 
Gamma  $2,525,960  $717,120  2,525,960/717,120 = 3.52 
Calculation of NPV
Alpha  Beta  Gamma  
Annual net cash flow  351,145  461,411  717,120 
Present value factor  2.991  2.991  2.991 
Present value of annual net cash flows  1,050,275  1,380,080  2,144,906 
Amount to be invested  1,472,000  5,678,900  2,525,960 
Net present value  421,725  4,298,820  381,054 
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