Question

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 26,250 26,250 26,250 26,250 11,250 11,250 11,250 11,250 $56,250 $131,250 Each project requires an investment of $75,000. 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. Instructions 1. Compute the following: a. The average rate of return for each investment. Round to one decimal place. b. The net present value for each investment. Use the present value of $1 table appearing in this chapter (Exhibit 2). Round present values to the nearest dollar. 2.Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.

Answer 1

20 21 Ques 2 22 a.Both projects have same average annual rate of return 23 b.Although both projects exceed the selected rate established for discounted cash flows 25 larger cash flows occur earlier in tine compared to green house.Thus if only two projects can 27