Financial & Managerial Accounting
13th Edition
ISBN: 9781285866307
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Chapter 25, Problem 25.1APR
1. (a)
To determine
Average
Average rate of return is a method that measures the average earnings of a particular business, as a percentage of the average investment. It is also known as accounting rate of return.
To determine: The average rate of return for each project.
(b)
To determine
Net present value method is the method which is used to compare the initial
To determine: The net present value of each investment, using the present value of $1 table in Exhibit 2.
2.
To determine
To discuss: The merits of the two investments to the capital investment committee.
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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
Year
1
2
3
4
5
Total
Year
1
2
3
4
5
6
7
8
9
10
Required:
Operating
Income
$62,000
62,000
62,000
62,000
62,000
$310,000
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 10% for purposes of the net present value analysis.
Present Value of $1 at Compound Interest
6%
10%
15%
0.943
0.909
0.870
0.890
0.826
0.756
0.840
0.751
0.658
0.792
0.683
0.636
0.572
0.747
0.621
0.567 0.497
0.705
0.564 0.507 0.432
0.665
0.513
0.452 0.376
0.627
0.467
0.404
0.327
0.592
0.361
0.284
0.558
0.322 0.247
Front-End Loader
Greenhouse
0.424
Net Cash
Flow
$187,000
187,000
187,000
0.386
187,000
187,000
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Average rate of return method, net present value method, and analysisThe capital investment committee of Nature's Portrait LandscapingCompany is considering two capital investments. The estimated incomefrom operations and net cash flows from each investment are as follows:
Each project requires an investment of $75,000. Straight-linedepreciation will be used, and no residual value is expected. Thecommittee has selected a rate of 12% for purposes of the net presentvalue analysis.
Instructions1. Compute the following:a. The average rate of return for each investment. Round to onedecimal place.b. The net present value for each investment. Use the present valueof $1 table appearing in this chapter (Exhibit 2). Round present values to the nearest dollar.2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.
Required:
1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place.
Average Rate of Return
Greenhouse
Front-End Loader
1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, round to the nearest dollar.
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
would be the more attractive.
cash flows occur earlier in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the
Chapter 25 Solutions
Financial & Managerial Accounting
Ch. 25 - Prob. 1DQCh. 25 - Discuss the principal limitations of the cash...Ch. 25 - Prob. 3DQCh. 25 - Prob. 4DQCh. 25 - Prob. 5DQCh. 25 - Prob. 6DQCh. 25 - Prob. 7DQCh. 25 - Two projects have an identical net present value...Ch. 25 - Prob. 9DQCh. 25 - Prob. 10DQ
Ch. 25 - Prob. 11DQCh. 25 - Give an example of a qualitative factor that...Ch. 25 - Average rate of return Determine the average rate...Ch. 25 - Average rate of return Determine the average rate...Ch. 25 - Cash payback period A project has estimated annual...Ch. 25 - Prob. 25.2BPECh. 25 - Prob. 25.3APECh. 25 - Prob. 25.3BPECh. 25 - Internal rate of return A project is estimated to...Ch. 25 - Prob. 25.4BPECh. 25 - Prob. 25.5APECh. 25 - Prob. 25.5BPECh. 25 - Prob. 25.1EXCh. 25 - Average rate of returncost savings Midwest...Ch. 25 - Average rate of returnnew product Galactic Inc. is...Ch. 25 - Calculate cash flows Natures Way Inc. is planning...Ch. 25 - Prob. 25.5EXCh. 25 - Cash payback method Lily Products Company is...Ch. 25 - Prob. 25.7EXCh. 25 - Prob. 25.8EXCh. 25 - Prob. 25.9EXCh. 25 - Prob. 25.10EXCh. 25 - Net present value method for a service company...Ch. 25 - Present value index Dip N' Dunk Doughnuts has...Ch. 25 - Net present value method and present value index...Ch. 25 - Average rate of return, cash payback period, net...Ch. 25 - Cash payback period, net present value analysis,...Ch. 25 - Internal rate of return method The internal rate...Ch. 25 - Prob. 25.17EXCh. 25 - Internal rate of return methodtwo projects Munch N...Ch. 25 - Prob. 25.19EXCh. 25 - Prob. 25.20EXCh. 25 - Net present value unequal lives Bunker Hill Mining...Ch. 25 - Net present value unequal lives Daisys Creamery...Ch. 25 - Prob. 25.1APRCh. 25 - Cash payback period, net present value method, and...Ch. 25 - Prob. 25.3APRCh. 25 - Prob. 25.4APRCh. 25 - Prob. 25.5APRCh. 25 - Prob. 25.6APRCh. 25 - Prob. 25.1BPRCh. 25 - Cash payback period, net present value method, and...Ch. 25 - Prob. 25.3BPRCh. 25 - Net present value method, internal rate of return...Ch. 25 - Prob. 25.5BPRCh. 25 - Capital rationing decision for a service company...Ch. 25 - Ethics in Action Danielle Hastings was recently...Ch. 25 - Prob. 25.2CPCh. 25 - Prob. 25.3CPCh. 25 - Qualitative issues in investment analysis The...Ch. 25 - Prob. 25.5CP
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