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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 projects. The estimated income from operations and net cash flows from each investment are as follows:

Warehouse Tracking Technology

YearIncome from OperationsNet Cash Flow Income from OperationsNet Cash Flow

1$57,200 $179,000 $120,000 $286,000

257,200 179,000 92,000 242,000

357,200 179,000 46,000 170,000

457,200 179,000 20,000 116,000

557,200 179,000 8,000 81,000

Total$286,000 $895,000 $286,000 $895,000

Each project requires an investment of $520,000. 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

Year6% 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

Less amount to be invested

net present value

Less amount to be invested$fill in the blank 5$fill in the blank 6

Net present value