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	$46,200		$150,000			$97,000		$240,000
2	46,200		150,000			74,000		203,000
3	46,200		150,000			37,000		143,000
4	46,200		150,000			16,000		98,000
5	46,200		150,000			7,000		66,000
Total	$231,000		$750,000			$231,000		$750,000

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 15% 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

Answer to Part 1a.

Average Rate of Return = Average Annual Income / Investment * 100

Front – End Loader:
Average Annual Income = ($46,200 + $46,200 + $46,200 + $46,200 + $46,200) / 5
Average Annual Income = $46,200

Average Rate of Return = 46,200 / 440,000 * 100
Average Rate of Return = 10.50%

Greehouse:
Average Annual Income = ($97,000 + $74,000 + $37,000 + $16,000 + $7,000) / 5
Average Annual Income = $46,200

Average Rate of Return = 46,200 / 440,000 * 100
Average Rate of Return = 10.50%