Average Rate of Return Method, Net Present Value Method, and Analysis for a service company 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 income from operations and net cash flows from each investment are as follows:Front-End LoaderGreenhouseIncome fromNet CashIncome fromNet CashYearOperationsFlowOperationsFlow$50,000$158,000$105,000$253,000250,000158,00080,000213,000350,000158,00040,000150,000450,000158,00018,000103,000550,000158,0007,00071,000Total$250,000$790,000$250,000$790,000Each project requires an investment of $500,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis.Present Value of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83320.8900.8260.7970.7560.6940.8400.7510.7120.6580.57940.7920.6830.6360.5720.4820.7470.6210.5670.4970.4020.7050.5640.5070.4320.33570.6650.5130.4520.3760.2790.6270.4670.4040.3270.2330.5920.4240.3610.2840.194100.5580.3860.3220.2470.162 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 Loader%Greenhouse1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value.Front-End LoaderGreenhousePresent value of net cash flowAmount to be investedNet 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 anet present value because cash flows occurin time compared to the greenhouse. Thus, if only one of the two projects can be accepted, thewould be the more attractive.

The average rate of return = Average net profit / Initial investment Average net profits = Sum total…

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 income from operations and net cash flows from each investment are as follows: Front-End Loader Greenhouse Income from Net Cash Income from Net Cash Year Operations Flow Operations Flow 1 $50,000 $158,000 $105,000 $253,000 2. 50,000 158,000 80,000 213,000 3 50,000 158,000 40,000 150,000 4. 50,000 158,000 18,000 103,000 5 50,000 158,000 7,000 71,000 Total $250,000 $790,000 $250,000 $790,000 Each project requires an investment of $500,000. Straight-line depreciation will be used, and no residual value expected. The committee has selected a rate of 15% for purposes of the net present value analysis.

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 income from operations and net cash flows from each investment are as follows: Front-End Loader Greenhouse Income from Net Cash Income from Net Cash Year Operations Flow Operations Flow 1 $50,000 $158,000 $105,000 $253,000 2. 50,000 158,000 80,000 213,000 3 50,000 158,000 40,000 150,000 4. 50,000 158,000 18,000 103,000 5 50,000 158,000 7,000 71,000 Total $250,000 $790,000 $250,000 $790,000 Each project requires an investment of $500,000. Straight-line depreciation will be used, and no residual value expected. The committee has selected a rate of 15% for purposes of the net present value analysis.

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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