Question

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	$41,800		$132,000			$88,000		$211,000
2	41,800		132,000			67,000		178,000
3	41,800		132,000			33,000		125,000
4	41,800		132,000			15,000		86,000
5	41,800		132,000			6,000		60,000
Total	$209,000		$660,000			$209,000		$660,000

Each project requires an investment of $440,000. 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.

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	$	$

Answer 1

	Front-End Loader	Greenhouse
Year	Income from	Income from
	Operations	Operations
1	$   41,800.00	$   88,000.00
2	$   41,800.00	$   67,000.00
3	$   41,800.00	$   33,000.00
4	$   41,800.00	$   15,000.00
5	$   41,800.00	$     6,000.00
Total	$2,09,000.00	$2,09,000.00
Number of years	5	5
Average return	$     41,800.00	$     41,800.00

Average rate of Return
	Average Return	Average Investment	Average rate of return
Front-end Loader	$     41,800.00	$ 2,20,000.00	19.0%
Greenhouse	$     41,800.00	$ 2,20,000.00	19.0%

Average investment = (Book value of investment in the beginning + book value of investments at the end) / 2

Requirement 2

Front end Loader
Year	Net cash inflows			Discounting factor	Discounted cash flow
1	$       1,32,000.00			0.893	$   1,17,876
2	$       1,32,000.00			0.797	$   1,05,204
3	$       1,32,000.00			0.658	$       86,856
4	$       1,32,000.00			0.572	$       75,504
5	$       1,32,000.00			0.497	$       65,604
Present value of all cash inflow					$   4,51,044
Amount to be invested					$   4,40,000
Net Present value					$       11,044

Greenhouse
Year	Net cash inflows			Discounting factor	Discounted cash flow
1	$       2,11,000.00			0.893	$   1,88,423
2	$       1,78,000.00			0.797	$   1,41,866
3	$       1,25,000.00			0.658	$       82,250
4	$          86,000.00			0.572	$       49,192
5	$          60,000.00			0.497	$       29,820
Present value of all cash inflow					$   4,91,551
Amount to be invested					$   4,40,000
Net Present value					$       51,551

Answer—

	Front end Loader	Greenhouse
Present Value of net cash flow	$   4,51,044	$   4,91,551
Amount to be invested	$   4,40,000	$   4,40,000
Net Present Value	$       11,044	$       51,551