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Average Rate of Return Method, Net Present Value Method, and Analysis for a service company The capital investment committee of Arches 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 Income from Net Cash Income from Net Cash Year Operations Flow Operations Flow 1 $54,000 $ $174,000 $113,000 $278,000 2 2 54,000 174,000 86,000 235,000 3 54,000 174,000 43,000 165,000 4 54,000 174,000 19,000 113,000 79,000 5 54,000 174,000 9,000 Total $270,000 $870,000 $270,000 $ $870,000 Each project requires an investment of $600,000. 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. 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 3 0.840 0.751 0.712 0.658 0.579 4 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 7 0.665 0.513 0.452 0.376 0.279 Required: 1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place. Average Rate of Return Front-End Loader % Greenhouse % 1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value. Front-End Loader Greenhouse Present value of net cash flow $ Amount to be invested Net present value 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments. The front-end loader has a smaller net present value because cash flows occur later in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, the greenhouse would be the more attractive

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