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	$63,000		$205,000			$132,000		$328,000
2	63,000		205,000			101,000		277,000
3	63,000		205,000			50,000		195,000
4	63,000		205,000			22,000		133,000
5	63,000		205,000			10,000		92,000
Total	$315,000		$1,025,000			$315,000		$1,025,000

Each project requires an investment of $600,000. 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	$	$

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   net present value because the cash flows occur   in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the   would be the more attractive.

Answer 1

Average Investment	300000	=600000/2
1a
	Average Rate of Return
Front-End Loader	21%	=63000/300000
Greenhouse	21%	=63000/300000
1b
	Front-End Loader	Greenhouse
Present value of net cash flow	687365	744882
Amount to be invested	600000	600000
Net present value	87365	144882
2
The front-end loader has a lower net present value because the cash flows occur later in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the Greenhouse would be the more attractive.
Workings:
	Front-End Loader			Greenhouse
	Cash flows	PV factor 15%	Present value	Cash flows	PV factor 15%	Present value
1	205000	0.870	178350	328000	0.870	285360
2	205000	0.756	154980	277000	0.756	209412
3	205000	0.658	134890	195000	0.658	128310
4	205000	0.572	117260	133000	0.572	76076
5	205000	0.497	101885	92000	0.497	45724
		Total	687365		Total	744882