Attachment Included

The capital investment committee of Overnight Express Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:

Distribution Center Expansion Internet Tracking Technology

Income from Net Cash Income from Net Cash

Year Operations flows operations flows

1 $ 66,000 $ 226,000 $ 200,000 $ 360,000

2 66,000 226,000 90,000 250,000

3 66,000 226,000 30,000 190,000

4 66,000 226,000 10,000 170,000

5 66,000 226,000 0 160,000

Total $ 330,000 $ 1,130,000 $ 330,000 $ 1,130,000

Each project requires an investment of $800,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis.

Instruction

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 table appearing in this chapter.

2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two projects.

Problem 15-1 Name: Section: Score: 0% Key Code: 2 Instructions Answers are entered in the cells with gray backgrounds. Cells with non-gray backgrounds are protected and cannot be edited. A red asterisk (*) will appear beside, below or above an incorrect answer. 1. a. Average annual rate of return for both projects: b. = Net present value analysis: Year Present Value of $1 at 15% Factor Net Cash Flows Dist. Center Expansion Tracking Technology Present Value of Net Cash Flows Dist. Center Expansion Tracking Technology 1 2 3 4 5 Total Amount to be invested Net present value 2. Which of the following points are valid and should be reported to the investment committee? a. Considering only quantitative factors, the tracking technology investment should be selected since it has a positive net present value. b. Both projects offer the same average annual rate of return. c. Only the tracking technology proposal exceeds the selected rate established for discounted cash flows (15%)