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 1 2 3 4 5 Total Year 1 2 3 4 5 6 7 8 Operating Income 9 10 $54,000 54,000 54,000 54,000 54,000 $270,000 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 6% 12% 20% 10% 0.909 0.943 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.621 0.567 0.497 0.402 0.564 0.507 0.432 0.335 0.513 0.452 0.376 0.279 0.467 0.404 0.327 0.233 0.424 0.361 0.284 0.194 0.386 0.322 0.247 0.162 Net Cash Flow $172,000 172,000 172,000 172,000 172,000 $860,000 0.747 0.705 0.665 0.627 0.592 0.558 Operating Income 15% $113,000 86,000 43,000 19,000 9,000 $270,000 Net Cash Flow $275,000 232,000 163,000 112,000 78,000 $860,000
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 1 2 3 4 5 Total Year 1 2 3 4 5 6 7 8 Operating Income 9 10 $54,000 54,000 54,000 54,000 54,000 $270,000 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 6% 12% 20% 10% 0.909 0.943 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.621 0.567 0.497 0.402 0.564 0.507 0.432 0.335 0.513 0.452 0.376 0.279 0.467 0.404 0.327 0.233 0.424 0.361 0.284 0.194 0.386 0.322 0.247 0.162 Net Cash Flow $172,000 172,000 172,000 172,000 172,000 $860,000 0.747 0.705 0.665 0.627 0.592 0.558 Operating Income 15% $113,000 86,000 43,000 19,000 9,000 $270,000 Net Cash Flow $275,000 232,000 163,000 112,000 78,000 $860,000
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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