Average Rate of Return Method, Net Present Value Method, and Analysis for a service companyThe 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 LoaderYear12345TotalYear1234567OperatingIncome8910$54,00054,00054,00054,00054,000$270,0000.943Each 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 Interest6%0.8900.8400.7920.7470.7050.6650.6270.5920.55810%Net CashFlow0.9090.8260.751$172,000172,000172,000172,000172,000$860,00012%0.8930.7970.7560.7120.6580.6830.6360.5720.621 0.567 0.4970.5640.5070.5130.4670.4240.3860.4520.40415%0.3610.3220.8700.4320.3760.3270.2840.247OperatingIncome$113,00086,00043,00019,0009,000$270,00020%Greenhouse0.8330.6940.5790.4820.4020.3350.2790.2330.1940.162Net CashFlow$275,000232,000163,000112,00078,000$860,000 Required:1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place.Average Rate of ReturnFront-End LoaderGreenhouse%Present value of net cash flowAmount to be invested%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 LoaderGreenhouseNet present value2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.The front-end loader has alnet present value because cash flows occurwould be the more attractive.in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the

Net Present value is present value of cash flow minus initial investment

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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