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	$50,000		$161,000			$105,000		$258,000
2	50,000		161,000			80,000		217,000
3	50,000		161,000			40,000		153,000
4	50,000		161,000			18,000		105,000
5	50,000		161,000			7,000		72,000
Total	$250,000		$805,000			$250,000		$805,000

Each project requires an investment of $500,000. 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	$	$

Answer 1

Requirement 1a

Average rate of Return
	Average Return	Average Investment	Average rate of return
Front-end Loader	$     50,000.00	$ 2,50,000.00	20.0%
Greenhouse	$     50,000.00	$ 2,50,000.00	20.0%

Average investment =(Book value of Investment at Beginning  +Book value of investment at ending )/2

	Front-End Loader	Greenhouse
Year	Income from	Income from
	Operations	Operations
1	$   50,000.00	$1,05,000.00
2	$   50,000.00	$   80,000.00
3	$   50,000.00	$   40,000.00
4	$   50,000.00	$   18,000.00
5	$   50,000.00	$     7,000.00
Total	$2,50,000.00	$2,50,000.00
Number of years	5	5
Average return	$     50,000.00	$     50,000.00

Requirement 1b

Front end Loader
Year	Net cash inflows			Discounting factor	Discounted cash flow
1	$       2,58,000.00			0.909	$   2,34,522
2	$       2,17,000.00			0.826	$   1,79,242
3	$       1,53,000.00			0.751	$   1,14,903
4	$       1,05,000.00			0.683	$       71,715
5	$          72,000.00			0.621	$       44,712
Present value of all cash inflow					$   6,45,094
Amount to be invested					$   5,00,000
Net Present value					$   1,45,094

Greenhouse
Year	Net cash inflows			Discounting factor	Discounted cash flow
1	$       1,61,000.00			0.909	$   1,46,349
2	$       1,61,000.00			0.826	$   1,32,986
3	$       1,61,000.00			0.751	$   1,20,911
4	$       1,61,000.00			0.683	$   1,09,963
5	$       1,61,000.00			0.621	$       99,981
Present value of all cash inflow					$   6,10,190
Amount to be invested					$   5,00,000
Net Present value					$   1,10,190

	Front end Loader	Greenhouse
Present Value of net cash flow	$   6,45,094	$   6,10,190
Amount to be invested	$   5,00,000	$   5,00,000
Net Present Value	$   1,45,094	$   1,10,190