Need assistance on calculating the following: Average Rate of Return Method, Net

Question

Need assistance on calculating the following:

Average Rate of Return Method, Net Present Value Method, and Analysis for a Service Company The capital investment committee of Touch of Eden Landscaping Company is considering two capital investments. The estimated income from operations and net cash flows from each investment are as follows: Front-End Loader Greenhouse Fixtures Income from Operations $23,000 20,000 12,000 (2,000) (2,000) $51,000 Income from Operations $10,200 10,200 10,200 10,200 10,200 $51,000 Net Cash Net Cash Year Flow Flow $35,000 32,000 24,000 10,000 10,000 $111,000 $ 22,200 22,200 22,200 22,200 22,200 $111,000 2 3 4 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.

Explanation / Answer

Frontend loader Greenhouse fixtures Annual Income 1 23000 10200 2 20000 10200 3 12000 10200 4 -2000 10200 5 -2000 10200 Total 51000 51000 Calculating ARR Average annual profit-Total/5 10200 10200 Initial investment 60000 60000 Average investment-(Initial investment- scrap value)/2 30000 30000 Average Rate of Return 34 34 Year Front loader PV F @ 12% PV @ 12% Greenhouse fixtures PV @ 12% Year 0 -60000 1 -60000 -60000 -60000 1 35000 0.893 31255 22200 19824.6 2 32000 0.797 25504 22200 17693.4 3 24000 0.712 17088 22200 15806.4 4 10000 0.636 6360 22200 14119.2 5 10000 0.567 5670 22200 12587.4 NPV 25877 20031 IRR 33% 25% Front loader Greenhouse fixtures Average Rate of Return 34 34 IRR 33% 25% NPV 25877 20031

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