Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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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:

| Year | Front-End Loader Operating Income | Front-End Loader Net Cash Flow | Greenhouse Operating Income | Greenhouse Net Cash Flow |
|------|-----------------------------------|-------------------------------|-----------------------------|---------------------------|
| 1    | $46,200                           | $145,000                      | $97,000                     | $232,000                  |
| 2    | 46,200                            | 145,000                       | 74,000                      | 196,000                   |
| 3    | 46,200                            | 145,000                       | 37,000                      | 138,000                   |
| 4    | 46,200                            | 145,000                       | 16,000                      | 94,000                    |
| 5    | 46,200                            | 145,000                       | 7,000                       | 65,000                    |
| **Total** | **$231,000**                      | **$725,000**                     | **$231,000**                 | **$725,000**               |

Each project requires an investment of $420,000. 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|

This table displays the present value of $1 at various interest rates over three years, which is useful for calculating the net present value of future cash flows for investment appraisal.
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Transcribed Image Text:**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: | Year | Front-End Loader Operating Income | Front-End Loader Net Cash Flow | Greenhouse Operating Income | Greenhouse Net Cash Flow | |------|-----------------------------------|-------------------------------|-----------------------------|---------------------------| | 1 | $46,200 | $145,000 | $97,000 | $232,000 | | 2 | 46,200 | 145,000 | 74,000 | 196,000 | | 3 | 46,200 | 145,000 | 37,000 | 138,000 | | 4 | 46,200 | 145,000 | 16,000 | 94,000 | | 5 | 46,200 | 145,000 | 7,000 | 65,000 | | **Total** | **$231,000** | **$725,000** | **$231,000** | **$725,000** | Each project requires an investment of $420,000. 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| This table displays the present value of $1 at various interest rates over three years, which is useful for calculating the net present value of future cash flows for investment appraisal.
**Educational Content: Present Value of $1 Table and Investment Calculations**

**Present Value of $1:**

This table provides the present value (PV) of $1 for different interest rates (from 4% to 15%) over the course of 10 years. The table lists the present value factors needed to discount future cash flows to present values. 

| Year | 4%   | 6%   | 8%   | 10%  | 12%  | 15%  |
|------|------|------|------|------|------|------|
| 1    | 0.962| 0.943| 0.926| 0.909| 0.893| 0.870|
| 2    | 0.925| 0.890| 0.857| 0.826| 0.797| 0.756|
| 3    | 0.889| 0.840| 0.793| 0.751| 0.712| 0.658|
| 4    | 0.855| 0.792| 0.735| 0.683| 0.636| 0.572|
| 5    | 0.822| 0.747| 0.681| 0.621| 0.567| 0.497|
| 6    | 0.790| 0.705| 0.630| 0.564| 0.507| 0.432|
| 7    | 0.760| 0.665| 0.583| 0.513| 0.452| 0.376|
| 8    | 0.731| 0.627| 0.540| 0.467| 0.404| 0.327|
| 9    | 0.703| 0.592| 0.500| 0.424| 0.361| 0.284|
| 10   | 0.676| 0.558| 0.463| 0.386| 0.322| 0.247|

**Required Tasks:**

1a. **Average Rate of Return:**
   - Compute the average rate of return for each investment option:
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Transcribed Image Text:**Educational Content: Present Value of $1 Table and Investment Calculations** **Present Value of $1:** This table provides the present value (PV) of $1 for different interest rates (from 4% to 15%) over the course of 10 years. The table lists the present value factors needed to discount future cash flows to present values. | Year | 4% | 6% | 8% | 10% | 12% | 15% | |------|------|------|------|------|------|------| | 1 | 0.962| 0.943| 0.926| 0.909| 0.893| 0.870| | 2 | 0.925| 0.890| 0.857| 0.826| 0.797| 0.756| | 3 | 0.889| 0.840| 0.793| 0.751| 0.712| 0.658| | 4 | 0.855| 0.792| 0.735| 0.683| 0.636| 0.572| | 5 | 0.822| 0.747| 0.681| 0.621| 0.567| 0.497| | 6 | 0.790| 0.705| 0.630| 0.564| 0.507| 0.432| | 7 | 0.760| 0.665| 0.583| 0.513| 0.452| 0.376| | 8 | 0.731| 0.627| 0.540| 0.467| 0.404| 0.327| | 9 | 0.703| 0.592| 0.500| 0.424| 0.361| 0.284| | 10 | 0.676| 0.558| 0.463| 0.386| 0.322| 0.247| **Required Tasks:** 1a. **Average Rate of Return:** - Compute the average rate of return for each investment option:
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