HomeGrown Company is a chain of grocery stores that are similar to indoor farmer's markets, providing fresh, local produce, meats, and dairy products to consumers in urban areas. HomeGrown is considering opening several stores in a new city, and has proposals from three contractors (Alpha, Beta, and Gamma companies) who would like to provide buildings for the new stores.The amount of expected revenue from the stores will depend on the design of the contractor. For example, if HomeGrown decides on a more open floor plan, with less shelf space for products, revenue would be lower overall. However, if HomeGrown decides on a very crowded floor plan, it may lose customers who appreciate a more open feel.As the project manager for HomeGrown, you are responsible for deciding which if any of the proposals to accept. HomeGrown's minimum acceptable rate of return is 20%. You receive the following data from the three contractors:Proposal Type of Floor Plan Investment if Selected Residual ValueAlpha Very open, like an indoor farmer’s market $1,472,000 $0.00Beta Standard grocery shelving and layout, minimal aisle space $5,678,900 $0.00Gamma Mix of open areas and shelving areas $2,525,960 $0.00You have calculated estimates of annual cash flows and average annual income from customers for each of the three contractors' plans. You believe that the annual cash flows will be equal for each of the 10 years for which you are preparing your capital investment analysis. Your conclusions are presented below.Proposal Estimated Average Annual Income Estimated Average (after depreciation) Annual Cash FlowAlpha $302,054 $351,145Beta $272,019 $475,608Gamma $626,564 $704,490You begin by trying to eliminate any proposals that are not yielding the company’s minimum required rate of return of 20%. Complete the table below, and decide whether Alpha, Beta, and/or Gamma should be eliminated because the average rate of return of their project is less than the company's minimum required rate of return.Complete the table below. Enter the average rates of return as percentages rounded to two decimal places.Proposal Annual Income Average InvestmentAverage Rate of ReturnAccept or Reject? Estimated AverageAlpha Accept Beta Reject Gamma Accept

Respuesta :

Answer:

HomeGrown Company

Return on Investment Analysis:

Proposal                                   Alpha              Beta                Gamma

Annual Income Average         $351,145        $475,608         $704,490

Investment Average             $302,054         $272,019         $626,564

Return on Investment              $49,091        $203,589           $77,926

Average Rate of Return               0.16                 0.75                    0.12

Expected Rate of Return             20%               20%                 20%

Accept/Reject                          Reject              Accept               Reject

 

Decision: Eliminate Alpha and Gamma, accept Beta based    

Explanation:

a) The Required Rate of Return (RRR) of an investment is the minimum return an investor will accept for making an investment.  It is the compensation expressed in percentage for a given level of risk associated with the investment.  The RRR is used to analyze the profitability of potential investment projects.  Once, this rate is determined, it will be compared with the Return on Investment to decide if the investment can be made or eliminated.

b)  The Return on Investment (ROI) is a financial performance measure which evaluates the efficiency of an investment or compares the efficiency of a number of different investments.  The ROI calculation is obtained dividing the benefit (or return) of an investment by the cost of the investment. The result is expressed as a percentage or a ratio.