Textbook Problem

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:

Each project requires an investment of 575,000. Straight-line depreciation will be used, and no residual value is expected, The committee has selected a rate of 12% for purposes of the net present value analysis.

Instructions

1. 1. Compute the following:

• A. The average rate of return for each investment.
• B. The net present value for each investment. Use the present value of $1 table appearing in this chapter (Exhibit 2). (Round present values to the nearest dollar.)

1. 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.