Please answer correctly ASAP.
HomeGrown Company
HomeGrown Company is a chain of grocery stores that are similar to indoor farmer's markets, providing fresh, local produce, meats, and dairy products to consumers in urban areas. HomeGrown is considering opening several stores in a new city, and has proposals from three contractors (Alpha, Beta, and Gamma companies) who would like to provide buildings for the new stores.
The amount of expected revenue from the stores will depend on the design of the contractor. For example, if HomeGrown decides on a more open floor plan, with less shelf space for products, revenue would be lower overall. However, if HomeGrown decides on a very crowded floor plan, it may lose customers who appreciate a more open feel.
As the project manager for HomeGrown, you are responsible for deciding which if any of the proposals to accept. HomeGrown's minimum acceptable rate of return is 20%. You receive the following data from the three contractors:
Proposal | Type of Floor Plan | Initial Cost if Selected |
Residual Value |
Alpha | Very open, like an indoor farmer’s market | $1,472,000 | $0.00 |
Beta | Standard grocery shelving and layout, minimal aisle space | 5,678,900 | 0.00 |
Gamma | Mix of open areas and shelving areas | 2,125,560 | 0.00 |
You have computed estimates of annual cash flows and average annual income from customers for each of the three contractors' plans. You believe that the annual cash flows will be equal for each of the 10 years for which you are preparing your capital investment analysis. Your conclusions are presented in the following table.
Proposal |
Estimated Average Annual Income (after depreciation) |
Estimated Average Annual Cash Flow |
Alpha | $291,014 | $351,145 |
Beta | 272,019 | 461,411 |
Gamma | 521,931 | 592,819 |
Method Comparison
Compare methods of capital investment analysis in the following table to begin your evaluation of the three capital investment proposals Alpha, Beta, and Gamma. You decide to compare four methods: the average rate of return, cash payback period, net present value, and internal rate of return methods.
Average Rate of Return Method |
Cash Payback Method |
Net Present Value Method |
Internal Rate of Return Method |
|
Considers the time value of money | No | No | Yes | Yes |
Does not consider the time value of money | Yes | Yes | No | No |
Easy to compute | Yes | Yes | No | No |
Not as easy to compute | No | No | Yes | Yes |
Directly considers expected cash flows | No | Yes | Yes | Yes |
Directly considers timing of expected cash flows | No | No | Yes | Yes |
Assumes cash flows can be reinvested at minimum desired rate of return | No | No | Yes | Yes |
Can be used to rank proposals even if project lives are not the same | Yes | Yes | No | Yes |
Average Rate of Return
You begin by trying to eliminate any proposals that are not yielding the company’s minimum required rate of return of 20%. Complete the following table, and decide whether Alpha, Beta, and/or Gamma should be eliminated because the average rate of return of their project is less than the company's minimum required rate of return.
Complete the following table. Enter the average rates of return as percentages rounded to two decimal places.
Proposal |
Estimated Average Annual Income |
Average Investment |
Average Rate of Return |
Accept or Reject |
Alpha | $ | $ | % | Accept |
Beta | Reject | |||
Gamma | Accept |
Cash Payback Method
You’ve decided to confirm your results from the average rate of return by using the cash payback method.
Using the following table, compute the cash payback period of each investment. If required, round the number of years in the cash payback period to a whole number.
Proposal |
Initial Cost |
Annual Net Cash Inflow |
Cash Payback Period in Years |
Alpha | $ | $ | |
Beta | |||
Gamma |
Net Present Value
Even though you’re fairly certain that your evaluation and elimination is correct, you would like to compare the three proposals using the net present value method, and get some data about the internal rate of return of the proposals, each of which are expected to generate their respective annual net cash inflows for a period of 10 years.
Compute the net present value of each proposal. You may need the following partial table of factors for present value of an annuity of $1. Round the present value of annual net cash flows to the nearest dollar. If your answer is zero enter "0". For the net present value, if required, use the minus sign (-) to indicate a negative amount.
Present Value of an Annuity of $1 at Compound Interest (Partial Table) |
||
Year | 10% | 20% |
1 | 0.909 | 0.833 |
5 | 3.791 | 2.991 |
10 | 6.145 | 4.192 |
Alpha | Beta | Gamma | |
Annual net cash flow | $ | $ | $ |
Present value factor | |||
Present value of annual net cash flows | $ | $ | $ |
Amount to be invested | |||
Net present value | $ | $ | $ |
Average Rate of Return:
Average Rate of Return = Average annual net earnings after tax divided by Initial Investment multiplied by 100
In this case, it is initial one-time investment and hence above formulae can be used.
If the investment is planned over period of time, average value of investment has to be arrived and average earnings has to be divided by average investment and then multiply the result by 100 to get %
Proposal | Estimated Average Annual Income | Average Investment | Average rate of return | Minimum Required rate of return is 20%; if COLUMN C is equal to or more than 20%, ACCEPT or REJECT |
A *** | B | C=A/B | ||
Alpha | 291,014.00 | 1,472,000.00 | 20% | Accept |
Beta | 272,019.00 | 5,678,900.00 | 5% | Reject |
Gamma | 521,931.00 | 2,125,560.00 | 25% | Accept |
*** Since Annual income of every year remains same, instead of computing the average separately, we have taken the income given as it is as average income; if it is not same year on year, then average income has to be computed by sum up of each year income and divide the result by number of years.
Based on above table, Proposal Beta can be rejected.
Cash Pay back method:
In case of Even cash flows year on year, Cash pay back period = Initial investment divided by average annual cash flow.
Proposal | Initial Investment | Annual Net Cash inflow | Cash pay back period (Number of years) (rounded off to 0 decimal places) |
A | B | C=A/B | |
Alpha | 1,472,000.00 | 351,145.00 | 4 |
Beta | 5,678,900.00 | 461,411.00 | 12 |
Gamma | 2,125,560.00 | 592,819.00 | 4 |
Net Present Value:
NPV for 10 years for each proposal as below:
Based on above workings, please find below summary:
Alpha | Beta | Gamma | ||
Annual Net Cash inflow (as given) | 351,145.00 | 461,411.00 | 592,819.00 | |
Present Value Factor | Please refer Schedule attached | |||
Present value of annual net cash flows (arrived as in above schedule) | A | 1,536,488.10 | 2,018,973.68 | 2,593,969.28 |
Amount to be invested (as given) | B | 1,472,000.00 | 5,678,900.00 | 2,125,560.00 |
Net Present Value | A-B | 64,488.10 | -3,659,926.32 | 468,409.28 |
Thus, even as per NPV method, Proposal Beta has to be rejected as it is not generating the inflow within expected life of 10 years.
Please answer correctly ASAP. HomeGrown Company HomeGrown Company is a chain of grocery stores that are...
HomeGrown Company is a chain of grocery stores that are similar to indoor farmer's markets, providing fresh, local produce, meats, and dairy products to consumers in urban areas. HomeGrown is considering opening several stores in a new city, and has proposals from three contractors (Alpha, Beta, and Gamma companies) who would like to provide buildings for the new stores. The amount of expected revenue from the stores will depend on the design of the contractor. For example, if HomeGrown decides...
Ranking Investment Proposals: Payback Period, Accounting Rate of Return, and Net Present Value Presented is information pertaining to the cash flows of three mutually exclusive investment proposals: Proposal X Proposal Y Proposal Z Initial investment $69,000 $69,000 $69,000 Cash flow from operations Year 1 60,000 34,500 69,000 Year 2 9,000 34,500 Year 3 33,500 33,500 Disinvestment 0. Life (years) 3 years 3 years 1 year(a) Select the best investment proposal using the payback period, the accounting rate of return on initial investment, and...
Ranking Investment Proposals:Payback Period, Accounting Rate of Return, and Net Present Value Presented is information pertaining to the cash flows of three mutually exclusive investment proposals: Proposal X Proposal Y Proposal Z Initial investment $81,000 $81,000 $81,000 Cash flow from operations Year 1 80,000 40,500 81,000 Year 2 1,000 40,500 Year 3 41,000 41,000 Disinvestment Life (years) 3 years 3 years 1 year 0 (a) Select the best investment proposal using the payback period, the accounting rate of return on...
-NM PR 11-6B Capital rationing decision for a service company involving Obj. 2, 3,5 four proposals Clearcast Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated income from operations, and net cash flow for each proposal are as follows: Income from Net Cash Investment Year Operations Flow Proposal A: $450,000 $ 30,000 $120,000 30,000 120,000 20,000 110,000 10,000 100,000 (30,000) 60,000 $ 60,000 $510,000 Proposal B: $200,000 $...
x Your answer is incorrect. Try again. Drake Corporation is reviewing an investment proposal. The initial cost and estimates of the book value of the investment at the end of each year, the net cash flows for each year, and the net income for each year are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is equal...
Simply Chocolate Company is considering two possible expansion plans.Proposal X involves opening five stores in North Carolina at a cost of $2,400,000. Under Proposal Y, the company would focus on Virginia and open six stores at a cost of $3,000,000. The following information is given for the two proposals: Proposal X Proposal Y Required investment $2,400,000 $3,000,000 Estimated life 10 years 10 years Estimated residual value $200,000 $200,000 Estimated annual net cash flows $450,000 $580,000 Required rate of return 14% ...
1. Which of the following capital investment evaluation methods use present values? A. Net present value method B.Average rate of return method C. Both "Net present value method" and "Average rate of return method" D. Neither "Net present value method" nor "Average rate of return method" 2. A common characteristic found in capital investment evaluation methods that use present values is ________. no interest rate an interest rate their ease of use None of these choices are correct. 3. Assume that...
E26-11 Drake Corporation is reviewing an investment proposal. The initial cost and esti- mates of the book value of the investment at the end of each year, the net cash flows for each year, and the net income for each year are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is equal to its book value. There...
Capital Rationing Decision for a Service Company Involving Four Proposals Renaissance Capital Group is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated operating income, and net cash flow for each proposal are as follows: Investment Year Operating Income Net Cash Flow Proposal A: $680,000 1 $ 64,000 $ 200,000 2 64,000 200,000 3 64,000 200,000 4 24,000 160,000 5 24,000 160,000 $240,000 $ 920,000 Proposal B: $320,000 1 $ 26,000...
Exercise 24-11 Drake Corporation is reviewing an investment proposal. The initial cost and estimates of the book value of the investment at the end of each year, the net cash flows for each year, and the net income for each year are presented in the schedule below. Al cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is equal to its book value. There...