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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

Year Income from

Operations Net Cash

Flow Income from

Operations Net Cash

Flow

$1$ $$37,400$ $$117,000$ $$79,000$ $$187,000$

$237,400117,00060,000158,000$

$337,400117,00030,000111,000$

$437,400117,00013,00076,000$

$537,400117,0005,00053,000$

Total $$187,000$ $$585,000$ $$187,000$ $$585,000$

Each project requires an investment of $$440,000.$ 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 $6\%10\%12\%15\%20\%$

$10\mathrm{.}9430\mathrm{.}9090\mathrm{.}8930\mathrm{.}8700\mathrm{.}833$

$20\mathrm{.}8900\mathrm{.}8260\mathrm{.}7970\mathrm{.}7560\mathrm{.}694$

$30\mathrm{.}8400\mathrm{.}7510\mathrm{.}7120\mathrm{.}6580\mathrm{.}579$

$40\mathrm{.}7920\mathrm{.}6830\mathrm{.}6360\mathrm{.}5720\mathrm{.}482$

$50\mathrm{.}7470\mathrm{.}6210\mathrm{.}5670\mathrm{.}4970\mathrm{.}402$

$60\mathrm{.}7050\mathrm{.}5640\mathrm{.}5070\mathrm{.}4320\mathrm{.}335$

$70\mathrm{.}6650\mathrm{.}5130\mathrm{.}4520\mathrm{.}3760\mathrm{.}279$

$80\mathrm{.}6270\mathrm{.}4670\mathrm{.}4040\mathrm{.}3270\mathrm{.}233$

$90\mathrm{.}5920\mathrm{.}4240\mathrm{.}3610\mathrm{.}2840\mathrm{.}194$

$100\mathrm{.}5580\mathrm{.}3860\mathrm{.}3220\mathrm{.}2470\mathrm{.}162$

Required:

$1$a$.$ 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 $2$

$\%$

$1$b$.$ 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

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.