omeGrown Company is a chain of grocery stores that are similar to indoor farmer\
ID: 2533577 • Letter: O
Question
omeGrown 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:
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.
Method comparison
Please make a check box for the 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
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.
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.
Net value present
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. Enter amounts that represent cash outflows as negative numbers using a minus sign. Round the present value of annual net cash flows to the nearest dollar.
Present Value of an Annuity of $1 at Compound Interest (Partial Table)
Final Questions
After reviewing all your data, answer the following questions (1)-(3).
1. What can you say about each proposal?
2. What can you say about these proposals? Check all that apply.
A.Only Gamma’s proposal is yielding more than HomeGrown’s minimum desired rate of return.
B.HomeGrown would be breaking even (i.e., profit = 0) if Alpha’s proposal is chosen.
C.Gamma’s proposal is the only proposal that would be acceptable to HomeGrown.
3. Which proposal is the best choice for HomeGrown given the data collected?
Alpha
Beta
Gamma
Proposal Type of Floor Plan Investment 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 2,525,960 0.00Explanation / Answer
1. Average Rate of Return A B A/B*100 Annual Income Average investment Average Rate of Return Accept or reject Alpha 313094 1472000 21.27% Accept Beta 272019 5678900 4.79% Reject Gama 620249 2525960 24.55% Accept 2. Cash Payback Method A B A/B*100 Intial Cost Annual Net Cash Flow Cash payback period Years Alpha 1472000 351145 4.19 Year Beta 5678900 461411 12.31 Year Gama 2525960 717120 3.52 Year 3. Net Present Value Alpha Beta Gama Annual Net Cash Flow 351145 461411 717120 Present Value Factor 20% 4.192 4.192 4.192 Present Value of annual net cash flow 1472000 1934235 3006167 Amount to be invested -1472000 -5678900 -2525960 Net Present Value 0 -3744665 480207 Internal Rate of return 20% More than 20% Less Then 20% at IRR, NPV is zero IRR increased means disount value will be lower and hence negative NPV IRR decreased means disount value will be higher and hence positive NPV Gama is the best since it has Higher Average Rate of Return Lower Pay Back period and Higher NPV
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