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The capital investment committee of Ellis Transport and Storage Inc. is considering two investment projects. The...

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 $49,300 $162,000 $104,000 $259,000 2 49,300 162,000 79,000 219,000 3 49,300 162,000 39,000 154,000 4 49,300 162,000 17,000 105,000 5 49,300 162,000 7,500 73,000 Total $246,500 $810,000 $246,500 $810,000 Each project requires an investment of $580,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% 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. If required, round your answer to one decimal place. Average Rate of Return Warehouse % Tracking Technology % 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. Warehouse Tracking Technology Present value of net cash flow total $ $ Less amount to be invested $ $ Net present value $ $ 2. The warehouse has a smaller net present value as tracking technology cash flows occur earlier in time. Thus, if only one of the two projects can be accepted, the tracking technology would be the more attractive. Feedback

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Expert Solution

Average Annual net income 49300 =246500/5
Average Investment 290000 =580000/2
1a
Average Rate of Return
Warehouse 17% =49300/290000
Tracking Technology 17% =49300/290000
1b
Warehouse Tracking Technology
Present value of net cash flow total 584010 623649
Less amount to be invested 580000 580000
Net present value 4010 43649
2
The warehouse has a smaller net present value as tracking technology cash flows occur earlier in time. Thus, if only one of the two projects can be accepted, the Tracking Technology would be the more attractive.
Workings:
Warehouse Tracking Technology
Year Cash flows PV factor 12% Present value Cash flows PV factor 12% Present value
1 162000 0.893 144666 259000 0.893 231287
2 162000 0.797 129114 219000 0.797 174543
3 162000 0.712 115344 154000 0.712 109648
4 162000 0.636 103032 105000 0.636 66780
5 162000 0.567 91854 73000 0.567 41391
Total 584010 Total 623649

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