Question

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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	$62,000		$198,000			$130,000		$317,000
2	62,000		198,000			99,000		267,000
3	62,000		198,000			50,000		188,000
4	62,000		198,000			22,000		129,000
5	62,000		198,000			9,000		89,000
Total	$310,000		$990,000			$310,000		$990,000

Each project requires an investment of $620,000. 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 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

Req 1.			Fron end	Green house
Total Income of operations			310000	310000
Divide: Number of Years			5	5
Average income from operations			62000	62000
Divide: Average Investment			310000	310000
Average rate of return			20%	20%
Req 2.
Year	PVF at 10%	CF of Project A	PVF of A	CF of Proj. B	PVF of B
1	0.909091	198000	180000	317000	288181.8
2	0.826446	198000	163636.4	267000	220661.2
3	0.751315	198000	148760.3	188000	141247.2
4	0.683013	198000	135236.7	129000	88108.74
5	0.620921	198000	122942.4	89000	55262
Present value of net cashh flows			750576		793461
Less: Investmentt			620000		620000
Net present value			130576		173461
The front end loader has a lower net present value because the cashflows occure in later time as compared to Greenhouse. Thus, if only one of the two projects can be accepted, Greenhouse shall be accepted.