Question

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

Answer 1

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