The capital investment committee of Touch of Eden Landscaping Company is conside

Question

The capital investment committee of Touch of Eden 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 Fixtures Year Income from Operations Net Cash Flow Income from Operations Net Cash Flow 1 $23,000 $ 35,000 $10,200 $ 22,200 2 20,000 32,000 10,200 22,200 3 12,000 24,000 10,200 22,200 4 (2,000) 10,000 10,200 22,200 5 (2,000) 10,000 10,200 22,200 $51,000 $111,000 $51,000 $111,000 Each project requires an investment of $60,000. 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 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 Greenhouse % Front End Loader % 1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, round to the nearest dollar. Front End Loader Greenhouse Present value of net cash flow total $ $ Less amount to be invested $ $ Net present value $ $ 2. The front end loader has a net present value because cash flows occur earlier in time compared to the greenhouse fixtures. Thus, if only one of the two projects can be accepted, the would be the more attractive.

Explanation / Answer

Answer: 1a Average Rate of Return=(Average income from operation/Invstment)*100

Front-End loader=((51000/5)/60000)*100=17%

Greem house fixtures=((51000/5)/60000)*100=17%

Answer: 1b

Answer: Front end loader would be more attractive.

Front end loader Green house Fixtures Year Net cash Flow P.V.F (12%) PV ($) Net cash Flow P.V.F (12%) PV ($) 0 -60000 1 -60000 -60000 1 -60000 1 35000 0.8928 31248 22200 0.8928 19820 2 32000 0.79719 25510 22200 0.79719 17698 3 24000 0.71178 17083 22200 0.71178 15802 4 10000 0.6355 6355 22200 0.6355 14108 5 10000 0.567426 5674 22200 0.567426 12597 NPV 25870 20024

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