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Problem - Average rate of return method, net present value method, and analysis
The capital investment committee of Hampton Landscaping Company is considering two capital investments. The estimated income from operations and net cash flows from each investment are as follows:
Greenhouse
Skid Loader
Year
Income from Operations
Net Cash Flow
1
$22,200
$ 35,000
$ 7,200
$ 20,000
2
12,200
25,000
7,200
20,000
3
4
(2,800)
10,000
5
$36,000
$100,000
Each project requires an investment of $64,000. 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.
2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.
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