The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Front-End Loader Greenhouse Year Operating Income Net Cash Flow Operating Income Net Cash Flow 1 $54,000 $173,000 $113,000 $277,000 2 54,000 173,000 86,000 234,000 3 54,000 173,000 43,000 164,000 4 54,000 173,000 19,000 112,000 5 54,000 173,000 9,000 78,000 Total $270,000 $865,000 $270,000 $865,000 Each project requires an investment of $540,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% 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. 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows:

	Front-End Loader		Greenhouse
Year	Operating Income	Net Cash Flow		Operating Income	Net Cash Flow
1	$54,000		$173,000			$113,000	$277,000
2	54,000		173,000			86,000	234,000
3	54,000		173,000			43,000	164,000
4	54,000		173,000			19,000	112,000
5	54,000		173,000			9,000	78,000
Total	$270,000		$865,000			$270,000	$865,000

Each project requires an investment of $540,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% 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.

2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.

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