Question

Hello, I am struggling with this homework problem for my accounting class. Thank you for the help!

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 Operating Income Net Cash Flow Operating Income Net Cash Flow Year $60,900 60,900 60,900 60,900 60,900 $190,000 190,000 190,000 190,000 190,000 $128,000 97,000 49,000 21,000 $304,000 257,000 181,000 124,000 9,500 84.000 Total $304,500 $950,000 $304,500 $950,000 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 12% for purposes of the net present value analysis. Present Value of $1 at Compound Interest 6% 10% 12% 15% 20% Year 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.909 0.893 0.826 0.797 0.751 0.712 0.6830.636 0.621 0.567 0.564 0.507 0.513 0.452 0.467 0.404 0.424 0.361 0.386 0 .322 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162

Answer 1

1a) Average rate of return

Front end loader = 152250/290000 = 52.50%

Greenhouse = 52.50%

1b) Calculate net present value

	Front end Loader	Greenhouse
Present value of net cash flow	190000*3.605 = 684950	731665
Amount to be invested	-580000	-580000
Net present value	104950	151665