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 Initial Cost Residual
if Selected Value
Alpha Very open, like an indoor farmer’s market $1,472,000 $0.00
Beta Standard grocery shelving and layout, minimal aisle space
5,678,900 0.00
Gamma Mix of open areas and shelving areas 2,125,560 0.00
You have computed 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 in the following table.
Proposal Estimated Average Estimated Average
Annual Income
(after depreciation) Annual Cash Flow
Alpha $291,014 $351,145
Beta 272,019 461,411
Gamma 527,245 592,819
Method Comparison
Compare methods of capital investment analysis to begin your evaluation of the three capital investment proposals Alpha, Beta, and Gamma. You decide to compare four methods: the average rate of return, cash payback period, net present value, and internal rate of return methods.