Average Rate of Return Method, A method of analysis of proposed capital investments that focuses on the present value of the cash flows expected from the investments.Net Present Value Method, and Analysis for a service company
The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows:
Front-End Loader | Greenhouse | |||||||||
Year | Operating Income |
Net Cash Flow |
Operating Income |
Net Cash Flow |
||||||
1 | $55,000 | $173,000 | $116,000 | $277,000 | ||||||
2 | 55,000 | 173,000 | 88,000 | 234,000 | ||||||
3 | 55,000 | 173,000 | 44,000 | 164,000 | ||||||
4 | 55,000 | 173,000 | 19,000 | 112,000 | ||||||
5 | 55,000 | 173,000 | 8,000 | 78,000 | ||||||
Total | $275,000 | $865,000 | $275,000 | $865,000 |
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 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, round to the nearest dollar. 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 | $ | $ |
a. | ||||
Average rate of return | Average net income/Average investment | |||
Calculation of average rate of return for Front end loader | ||||
Average operating income | $55,000 | 275000/5 | ||
Average investment | $250,000 | (500000+0)/2 | ||
Average rate of return | 22.00% | |||
Calculation of average rate of return for Greenhouse | ||||
Average operating income | $55,000 | 275000/5 | ||
Average investment | $250,000 | (500000+0)/2 | ||
Average rate of return | 22.00% | |||
b. | ||||
Calculation of net present value | ||||
Net present value | Present value of cash inflow - Present value of cash outflow | |||
Calculation of NPV for Front end loader | ||||
Year | Cash flow | Discount factor @ 15% | Present value | |
0 | -$500,000 | 1.000 | -$500,000 | |
1 | $173,000 | 0.870 | $150,510 | |
2 | $173,000 | 0.756 | $130,788 | |
3 | $173,000 | 0.658 | $113,834 | |
4 | $173,000 | 0.572 | $98,956 | |
5 | $173,000 | 0.497 | $85,981 | |
Net present value | $80,069 | |||
Calculation of NPV for Greenhouse | ||||
Year | Cash flow | Discount factor @ 15% | Present value | |
0 | -$500,000 | 1.000 | -$500,000 | |
1 | $277,000 | 0.870 | $240,990 | |
2 | $234,000 | 0.756 | $176,904 | |
3 | $164,000 | 0.658 | $107,912 | |
4 | $112,000 | 0.572 | $64,064 | |
5 | $78,000 | 0.497 | $38,766 | |
Net present value | $128,636 | |||
Average Rate of Return Method, A method of analysis of proposed capital investments that focuses on...
Average Rate of Return Method, Net Present Value Method, and Analysis for a service company 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 $39,100 $122,000 $82,000 $195,000 2 39,100 122,000 63,000 165,000 3 39,100 122,000 31,000 116,000 4 39,100 122,000 14,000 79,000 5...
Average Rate of Return Method, Net Present Value Method, and Analysis for a service company The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Front-End Loader Greenhouse Net Cash Operating Income Net Cash Flow Operating Income Year Flow $38,000 $80,000 $119,000 119,000 38,000 61,000 $190,000 161,000 113,000 77,000 38,000 119,000 30,000 38,000 119,000 13,000 38,000 119,000 6,000 54,000 Total $190,000 $595,000 $190,000...
Average Rate of Return Method, Net Present Value Method, and Analysis for a service company 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 $59,400 $195,000 $125,000 $312,000 2 59,400 195,000 95,000 263,000 3 59,400 195,000 48,000 185,000 4 59,400 195,000 21,000 127,000 5...
Average Rate of Return Method, Net Present Value Method, and Analysis for a service company 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 $41,800 $127,000 $88,000 $203,000 2 41,800 127,000 67,000 171,000 3 41,800 127,000 33,000 121,000 4 41,800 127,000 15,000 83,000 5...
Average Rate of Return Method, Net Present Value Method, and Analysis for a service company 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 $45,600 $141,000 $96,000 $226,000 2 45,600 141,000 73,000 190,000 3 45,600 141,000 36,000 134,000 4 45,600 141,000 16,000 92,000 5...
Average Rate of Return Method, Net Present Value Method, and Analysis for a service company 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 $38,000 $119,000 $80,000 $190,000 2 38,000 119,000 61,000 161,000 3 38,000 119,000 30,000 113,000 4 38,000 119,000 13,000 77,000 5...
1303 Problems: Series A Average rate of return method, net present value method, and analysis The capital investment committee of Nature's Portrait Landscaping Company is consider- ing two capital investments. The estimated income from operations and net cash flows from each investment are as follows: OBJ. 2, 3 V 1. a. 30.096 Excel Front-End Loader Income from Net Cash Income from Operations Net Cash Operations $25,000 20,000 7,000 3,000 1,250 S56,250 Year Flow Me How 22,000 18,000 16,250 $131,250 $11,250...
The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Front-End Loader Greenhouse Year Operating Income Net Cash Flow Operating Income Net Cash Flow 1 $59,400 $194,000 $125,000 $310,000 2 59,400 194,000 95,000 262,000 3 59,400 194,000 48,000 184,000 4 59,400 194,000 21,000 126,000 5 59,400 194,000 8,000 88,000 Total $297,000 $970,000 $297,000 $970,000 Each project requires an investment of $540,000. Straight-line depreciation...
The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Front-End Loader Greenhouse Year Operating Income Net Cash Flow Operating Income Net Cash Flow 1 $47,500 $155,000 $100,000 $248,000 2 47,500 155,000 76,000 209,000 3 47,500 155,000 38,000 147,000 4 47,500 155,000 17,000 101,000 5 47,500 155,000 6,500 70,000 Total $237,500 $775,000 $237,500 $775,000 Each project requires an investment of $500,000. Straight-line depreciation...
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 $39,600 $123,000 $83,000 $197,000 2 39,600 123,000 63,000 166,000 3 39,600 123,000 32,000 117,000 4 39,600 123,000 14,000 80,000 5 39,600 123,000 6,000 55,000 Total $198,000 $615,000 $198,000 $615,000 Each project requires an investment of...