Local Grown Inc., a local plant nursery, is considering purchasing a new plot of land for their business for $400,000. The land would allow Local Grown to increase their pre-tax operating income (and cash flow) by $80,000 each year. The company would plan to keep the land for 20 years before selling it for $800,000. Because the land is real property, the company would not take any related depreciation.
Alternatively, Local Grown could purchase a new greenhouse for $600,000. The greenhouse would return $180,000 before depreciation each year for 20 years, and would be fully depreciated over its 20-year useful life, at which point it would be sold for $100,000.
Local Grown's tax rate is 25%, and the required rate of return is 9%.
Based on the Average Rate of Return, which project is more attractive? Based on NPV, which project is more attractive? Use a financial calculator to compute NPV.

Question

Local Grown Inc., a local plant nursery, is considering purchasing a new plot of land for their business for $400,000. The land would allow Local Grown to increase their pre-tax operating income (and cash flow) by $80,000 each year. The company would plan to keep the land for 20 years before selling it for $800,000. Because the land is real property, the company would not take any related depreciation. 
Alternatively, Local Grown could purchase a new greenhouse for $600,000. The greenhouse would return $180,000 before depreciation each year for 20 years, and would be fully depreciated over its 20-year useful life, at which point it would be sold for $100,000.
Local Grown's tax rate is 25%, and the required rate of return is 9%.
Based on the Average Rate of Return, which project is more attractive? Based on NPV, which project is more attractive? Use a financial calculator to compute NPV.

Quizplus · Accepted Answer

The Answer of Local Grown Inc., a local plant nursery, is considering purchasing a new plot of land for their business for $400,000. The land would allow Local Grown to increase their pre-tax operating income (and cash flow) by $80,000 each year. The company would plan to keep the land for 20 years before selling it for $800,000. Because the land is real property, the company would not take any related depreciation. 
Alternatively, Local Grown could purchase a new greenhouse for $600,000. The greenhouse would return $180,000 before depreciation each year for 20 years, and would be fully depreciated over its 20-year useful life, at which point it would be sold for $100,000.
Local Grown's tax rate is 25%, and the required rate of return is 9%.
Based on the Average Rate of Return, which project is more attractive? Based on NPV, which project is more attractive? Use a financial calculator to compute NPV.