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 investmentare as follows:Front-End LoaderGreenhouseOperatingNet CashOperatingNet CashYearIncomeFlowIncomeFlow1$46,200$145,000$97,000$232,000246,200145,00074,000196,000346,200145,00037,000138,000446,200145,00016,00094,00046,200145,0007,00065,000Total$231,000$725,000$231,000$725,000Each 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 purposesof the net present value analysis.Present Value of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83320.8900.8260.7970.7560.69430.8400.7510.7120.6580.579 30.8400.7510.7120.6580.57940.7920.6830.6360.5720.4820.7470.6210.5670.4970.4020.7050.5640.5070.4320.33570.6650.5130.4520.3760.27980.6270.4670.4040.3270.23390.5920.4240.3610.2840.194100.5580.3860.3220.2470.162Required:la. Compute the average rate of return for each investment. If required, round your answer to one decimal place.Average Rate of ReturnFront-End LoaderX %GreenhouseX %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 toindicate a negative net present value.Front-End LoaderGreenhousePresent value of net cash flowAmount to be investedNet present value

Average rate of return : It is the average annual yield on the project i.e., average profit after…

Required: la. Compute the average rate of return for each investment. If required, round your answer to one decimal place. Average Rate of Return Front-End Loader X % Greenhouse X % 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 Loader Greenhouse Present value of net cash flow Amount to be invested Net present value

Required: la. Compute the average rate of return for each investment. If required, round your answer to one decimal place. Average Rate of Return Front-End Loader X % Greenhouse X % 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 Loader Greenhouse Present value of net cash flow Amount to be invested Net present value

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...

See similar textbooks

Similar questions

The income statement comparison for Rush Delivery Company shows the income statement for the current and prior year. A. Determine the operating income (loss) (dollars) for each year. B. Determine the operating income (percentage) for each year. C. The company made a strategic decision to invest in additional assets in the current year. These amounts are provided. Using the total assets amounts as the investment base, calculate the ROI. Was the decision to invest additional assets in the company successful? Explain. D. Assuming an 8% cost of capital, calculate the RI for each year. Explain how this compares to your findings in part C.
Net present value method, internal rate of return method, and analysis for a service company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: The wind turbines require an investment of 887,600, while the biofuel equipment requires an investment of 911,100. No residual value is expected from either project. Instructions 1. Compute the following for each project: A. The net present value. Use a rate of 6% and the present value of an annuity table appearing in Exhibit 5 of this chapter. B. A present value index. (Round to two decimal places.) 2. Determine the internal rate of return for each project by (A) computing a present value factor for an annuity of 1 and (B) using the present value of an annuity of 1 table appearing in Exhibit 5 of this chapter. 3. What advantage does the internal rate of return method have over the net present value method in comparing projects?
Assume San Lucas Corporation in MAD 26-1 assigns the following probabilities to the estimated annual net cash flows: a. Compute the expected value of the annual net cash flows. b. Determine the expected net present value of the equipment, assuming a desired rate of return of 10% and the expected annual net cash flows computed in part (a). Use the present value tables (Exhibits 2 and 5) provided in the chapter in determining your answer. c. Based on your results in parts (a) and (b), should San Lucas Corporation invest in the equipment?
Cash payback period for a service company Janes Clothing Inc. is evaluating two capital investment proposals for a retail outlet, each requiring an investment of 975,000 and each with a seven-year life and expected total net cash flows of 1,050,000. Location 1 is expected to provide equal annual net cash flows of 150,000, and Location 2 is expected to have the following unequal annual net cash flows: Determine the cash payback period for both location proposals.
Define each of the following terms: Operating plan; financial plan Spontaneous liabilities; profit margin; payout ratio Additional funds needed (AFN); AFN equation; capital intensity ratio; self-supporting growth rate Forecasted financial statement approach using percentage of sales Excess capacity; lumpy assets; economies of scale Full capacity sales; target fixed assets to sales ratio; required level of fixed assets
Assume a company is going to make an investment in a machine of $825,000 and the following are the cash flows that two different products would bring. Which of the two options would you choose based on the payback method?
Net present value method, present value index, and analysis for a service company First United Bank Inc. is evaluating three capital investment projects by using the net present value method. Relevant data related to the projects are summarized as follows: Instructions 1. Assuming that the desired rate of return is 15%, prepare a net present value analysis for each project. Use the present value table appearing in Exhibit 2 of this chapter. 2. Determine a present value index for each project. (Round to two decimal places.) 3. Which project offers the largest amount of present value per dollar of investment? Explain.