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	$52,200		$164,000			$110,000		$262,000
2	52,200		164,000			84,000		221,000
3	52,200		164,000			42,000		156,000
4	52,200		164,000			18,000		107,000
5	52,200		164,000			7,000		74,000
Total	$261,000		$820,000			$261,000		$820,000

Each project requires an investment of $580,000. 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 smaller  net present value because 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.

Answer 1

	ARR
Front-End Loader ((261000/5)/(580000/2))	18.0%
Greenhouse ((261000/5)/(580000/2))	18.0%
	Front-End Loader	Greenhouse
Present value of net cash flow	$621,560	$   656,895
Amount to be invested	$580,000	$   580,000
Net present value	$ 41,560	$     76,895

	Front-End Loader			Greenhouse
Year	Net Cash Flow	PV 10%	PV	Net Cash Flow	PV 10%	PV
							1	$     164,000	0.91	$ 149,076	$262,000	0.909	$238,158
2	$     164,000	0.83	$ 135,464	$221,000	0.826	$182,546
3	$     164,000	0.75	$ 123,164	$156,000	0.751	$117,156
4	$     164,000	0.68	$ 112,012	$107,000	0.683	$ 73,081
5	$     164,000	0.62	$ 101,844	$ 74,000	0.621	$ 45,954
Total	$     820,000		$ 621,560	$820,000		$656,895

2.

The front-end loader has a smaller net present value because 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 more attractive.