Average Rate of Return Method, Net Present Value Method, and Analysis for a service company 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 $55,800 $181,000 $117,000 $290,000 2 55,800 181,000 89,000 244,000 3 55,800 181,000 45,000 172,000 4 55,800 181,000 20,000 118,000 5 55,800 181,000 8,000 81,000 Total $279,000 $905,000 $279,000 $905,000 Each project requires an investment of $620,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% 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, 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 ? ? Amount to be invested ? ? Net present value ? ? 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.

Average Rate of Return Method, Net Present Value Method, and Analysis for a service company 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 $55,800 $181,000 $117,000 $290,000 2 55,800 181,000 89,000 244,000 3 55,800 181,000 45,000 172,000 4 55,800 181,000 20,000 118,000 5 55,800 181,000 8,000 81,000 Total $279,000 $905,000 $279,000 $905,000 Each project requires an investment of $620,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% 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, 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 ? ? Amount to be invested ? ? Net present value ? ? 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.

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 1PA: Average rate of return method, net present value method, and analysis for a service company The...

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Average Rate of Return Method, Net Present Value Method, and Analysis for a service company

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	$55,800	$181,000	$117,000	$290,000
2	55,800	181,000	89,000	244,000
3	55,800	181,000	45,000	172,000
4	55,800	181,000	20,000	118,000
5	55,800	181,000	8,000	81,000
Total	$279,000	$905,000	$279,000	$905,000

Each project requires an investment of $620,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% 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, 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	?	?
Amount to be invested	?	?
Net present value	?	?

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.

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