Problem: The capital investment committee of Nature ` s Beauty Landscaping Company is considering two capital investments. The estimate income from operations and net cash flows from each investment are as follows.
Greenhouse Skid loader
Year Income from Net Cash Income from Net Cash
Operations Flow Operations Flows
1 $ 9,000 $25,000 $19,000 $35,000
2 9,000 25,000 14,000 30,000
3 9,000 25,000 9,000 25,000
4 9,000 25,000 4,000 20,000
5 9,000 25,000 (1,000) 15,000
Total 45,000 125,000 45,000 125,000
Each project requires an investment of $80,000. Straight-line depreciation will be used, and, no residual value is expected. The committee has selected a rate of 10% for purposes of the net present value analysis.
INSTRUCTIONS:
1. Compute the following:
A. The average rate of return for each investment.
B. The net present value for each investment. Use the present value of $1.
2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.