Question
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 | $48,000 | $145,000 | $101,000 | $232,000 | ||||||
2 | 48,000 | 145,000 | 77,000 | 196,000 | ||||||
3 | 48,000 | 145,000 | 38,000 | 138,000 | ||||||
4 | 48,000 | 145,000 | 17,000 | 94,000 | ||||||
5 | 48,000 | 145,000 | 7,000 | 65,000 | ||||||
Total | $240,000 | $725,000 | $240,000 | $725,000 |
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.
Average Rate of Return | |
Warehouse | fill in the blank |
Tracking Technology | fill in the blank |
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. If required, round to the nearest dollar.
Warehouse | Tracking Technology | |
Present value of net cash flow total | $fill in the blank | $fill in the blank |
Less amount to be invested | $fill in the blank | $fill in the blank |
Net present value | $fill in the blank | $fill in the blank |
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.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started