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Average Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of Ellis Transport and Storage Inc. is considering two investment

  1. Average Rate of Return Method, Net Present Value Method, and Analysis

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

    Warehouse Tracking Technology
    Year Income from Operations Net Cash Flow Income from Operations Net Cash Flow
    1 $42,500 $139,000 $89,000 $222,000
    2 42,500 139,000 68,000 188,000
    3 42,500 139,000 34,000 132,000
    4 42,500 139,000 15,000 90,000
    5 42,500 139,000 6,500 63,000
    Total $212,500 $695,000 $212,500 $695,000

    Each project requires an investment of $500,000. 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.

    Present Value of $1 at Compound Interest
    Year 6% 10% 12% 15% 20%
    1 0.943 0.909 0.893 0.870 0.833
    2 0.890 0.826 0.797 0.756 0.694
    3 0.840 0.751 0.712 0.658 0.579
    4 0.792 0.683 0.636 0.572 0.482
    5 0.747 0.621 0.567 0.497 0.402
    6 0.705 0.564 0.507 0.432 0.335
    7 0.665 0.513 0.452 0.376 0.279
    8 0.627 0.467 0.404 0.327 0.233
    9 0.592 0.424 0.361 0.284 0.194
    10 0.558 0.386 0.322 0.247 0.162

    Required:

    1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place.

    Average Rate of Return
    Warehouse %
    Tracking Technology %

    1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value.

    Warehouse Tracking Technology
    Present value of net cash flow total $ $
    Less amount to be invested $ $
    Net present value $ $

    2. The warehouse has a net present value as tracking technology cash flows occur in time. Thus, if only one of the two projects can be accepted, the would be the more attractive.

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