Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 $40,800 $131,000 $86,000 $210,000
2 40,800 131,000 65,000 177,000
3 40,800 131,000 33,000 124,000
4 40,800 131,000 14,000 85,000
5 40,800 131,000 6,000 59,000
Total $204,000 $655,000 $204,000 $655,000

Each project requires an investment of $480,000. 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 fill in the blank 1%
Tracking Technology fill in the blank 2%

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 $fill in the blank 3 $fill in the blank 4
Less amount to be invested $fill in the blank 5 $fill in the blank 6
Net present value $fill in the blank 7 $fill in the blank 8

2. The warehouse has a

larger smaller

net present value as tracking technology cash flows occur

earlier more/ evenly later

in time. Thus, if only one of the two projects can be accepted, the

tracking technology/warehouse

would be the more attractive.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting Theory Conceptual Issues In A Political And Economic Environment

Authors: Harry I. Wolk, James L. Dodd, John J. Rozycki

7th Edition

1412953456, 978-1412953450

More Books

Students also viewed these Accounting questions