Brief report for the capital investment committee


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.

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Finance Basics: Brief report for the capital investment committee
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