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 are net cash flows from each investment are as follows:

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.

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. Round present values to the nearest dollar.

Present Value of $1 at Compound Interest

0.567

0.402

0.513

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

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 (2000) 10,000 10,200 22,200 5 (2000) 10,000 10,200 22,200 $51,000 $111,000 $51,000 $111,000

Explanation / Answer

Merits of the projects:

1. both the projects have a positive NPV hence both can be accepted

2. Both the project have a average rate of return greater than the cost of capital hence both are profitable projects both can be accepted.

Front end Loader Greenhouse Fixtures Year Income from operations Net Cash Flow Income from operations Net Cash Flow PV factor 12% PV cashflow of front end loader PV cashflow of Greenhouse Fixtures 0 -60000 -60000        1.000                   (60,000)                (60,000) 1 $23,000 $35,000 $10,200 $22,200        0.893                     31,255                  19,825 2 20,000 32,000 10,200 22,200        0.797                     25,504                  17,693 3 12,000 24,000 10,200 22,200        0.712                     17,088                  15,806 4 -2000 10,000 10,200 22,200        0.636                        6,360                  14,119 5 -2000 10,000 10,200 22,200        0.567                        5,670                  12,587 $51,000 $111,000 $51,000 $111,000 NPV                     25,877                  20,031

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