The capital investment committee of Estate 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 |
||
|
|
Income from |
Net Cash |
Income from |
Net Cash |
|
Year |
Operations |
Flow |
Operations |
Flow |
|
1 |
$16,000 |
$ 30,000 |
$26,000 |
$ 40,000 |
|
2 |
16,000 |
30,000 |
21,000 |
35,000 |
|
3 |
16,000 |
30,000 |
16,000 |
30,000 |
|
4 |
16,000 |
30,000 |
11,000 |
25,000 |
|
5 |
16,000 |
30,000 |
6,000 |
20,000 |
|
|
$80,000 |
$150,000 |
$80,000 |
$150,000 |
Each project requires an investment of $70,000. 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.