Average rate of return method, net present value method, and analysis for a service company

The capital investment committee of Iguana Inc. is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows:

Year	Robotic Assembler Operating Income	Robotic Assembler Net Cash Flow	Warehouse Operating Income	Warehouse Net Cash Flow
1	$45,600	$150,000	$96,000	$240,000
2	45,600	150,000	73,000	203,000
3	45,600	150,000	36,000	143,000
4	45,600	150,000	16,000	98,000
5	45,600	150,000	7,000	66,000
Total	$228,000	$750,000	$228,000	$750,000

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.

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.

Investment Committee	Average Rate of Return
Robotic Assembler	%
Warehouse	%

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

Line Item Description	Robotic Assembler	Warehouse
Present value of net cash flow	$fill in the blank 3	$fill in the blank 4
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. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments. The robotic assembler has a fill in the blank 1 of 3

smallerlargersmaller

net present value because cash flows occur fill in the blank 2 of 3

earlierlaterlater

in time compared to the warehouse. Thus, if only one of the two projects can be accepted, the fill in the blank 31 of 3

robotic assemblerwarehousewarehouse

would be the more attractive.

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