Average rate of return method, net present value method, and analysisThe capital investment committee of Nature's Portrait 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 Fixtures YearIncome from operations Net cash flowIncome from operations Net cash flow1$25,000$40,000$11,250$26,250220,00035,00011,25026,25037,00022,00011,25026,25043,00018,00011,25026,25051,25016,25011,25026,250Total$56,250$131,250$56,250$131,250Each project requires an investment of $75,000. 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.Instructions1. Compute the following:a. The average rate of return for each investment. Round to one decimal place.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.2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.

Information Provided: Discount rate = 12% Investment = $75,000

Answered: Average rate of return method, net…

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 1PB

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Average rate of return method, net present value method, and analysis
The capital investment committee of Nature's Portrait 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 Fixtures
Year	Income from operations	Net cash flow	Income from operations	Net cash flow
1	$25,000	$40,000	$11,250	$26,250
2	20,000	35,000	11,250	26,250
3	7,000	22,000	11,250	26,250
4	3,000	18,000	11,250	26,250
5	1,250	16,250	11,250	26,250
Total	$56,250	$131,250	$56,250	$131,250

Each project requires an investment of $75,000. 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. Compute the following:
a. The average rate of return for each investment. Round to one decimal place.
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.
2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.

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