Question

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	$54,000		$174,000			$113,000		$278,000
2	54,000		174,000			86,000		235,000
3	54,000		174,000			43,000		165,000
4	54,000		174,000			19,000		113,000
5	54,000		174,000			9,000		79,000
Total	$270,000		$870,000			$270,000		$870,000

Each project requires an investment of $600,000. 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	%18
Greenhouse	%18

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	$	$

Answer 1

	Front end loader
Year	Net cash flow	Pv rate at 10%	Pv of cash flows
1	174000	0.909	158166
2	174000	0.826	143724
3	174000	0.751	130674
4	174000	0.683	118842
5	174000	0.621	108054
	cash flow		659460
	initial investment		600000
	NPV		59460
	Green house
Year	Net cash flow	Pv rate at 10%	Pv of cash flows
1	278000	0.909	252702
2	235000	0.826	194110
3	165000	0.751	123915
4	113000	0.683	77179
5	79000	0.621	49059
	cash flow		696965
	initial investment		600000
	NPV		96965