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The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated income...

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
Year Income from
Operations
Net Cash
Flow
Income from
Operations
Net Cash
Flow
1 $56,700 $185,000 $119,000 $296,000
2 56,700 185,000 91,000 250,000
3 56,700 185,000 45,000 176,000
4 56,700 185,000 20,000 120,000
5 56,700 185,000 8,500 83,000
Total $283,500 $925,000 $283,500 $925,000

Each project requires an investment of $540,000. 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
Year 6% 10% 12% 15% 20%
1 0.943 0.909 0.893 0.870 0.833
2 0.890 0.826 0.797 0.756 0.694
3 0.840 0.751 0.712 0.658 0.579
4 0.792 0.683 0.636 0.572 0.482
5 0.747 0.621 0.567 0.497 0.402
6 0.705 0.564 0.507 0.432 0.335
7 0.665 0.513 0.452 0.376 0.279
8 0.627 0.467 0.404 0.327 0.233
9 0.592 0.424 0.361 0.284 0.194
10 0.558 0.386 0.322 0.247 0.162

Required:

1a. 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 %
Greenhouse %

1b. 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 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 (smaller / larger) net present value because cash flows occur (earlier / later) in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the (front-end loader / greenhouse) would be the more attractive.

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