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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

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 $32,400 $107,000 $68,000 $171,000
2 32,400 107,000 52,000 144,000
3 32,400 107,000 26,000 102,000
4 32,400 107,000 11,000 70,000
5 32,400 107,000 5,000 48,000
Total $162,000 $535,000 $162,000 $535,000

Each project requires an investment of $360,000. 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 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. If required, round to the nearest dollar.

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

earliermore evenlylater

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

tracking technologywarehouse

would be the more attractive.

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