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 $36,100 $115,000 $76,000 $184,000 2 36,100 115,000 58,000 155,000 3 36,100 115,000 29,000 109,000 4 36,100 115,000 13,000 75,000 5 36,100 115,000 4,500 52,000 Total $180,500 $575,000 $180,500 $575,000 Each project requires an investment of $380,000. 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% 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 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

Answer 1

	Warehouse		Tracking Technology
Year	Net income	Cashflow	Net income	Cashflow
1	$          36,100	$        115,000	$            76,000	$        184,000
2	$          36,100	$        115,000	$            58,000	$        155,000
3	$          36,100	$        115,000	$            29,000	$        109,000
4	$          36,100	$        115,000	$            13,000	$          75,000
5	$          36,100	$        115,000	$               4,500	$          52,000
Total	$        180,500	$        575,000	$          180,500	$        575,000
Average	$          36,100		$            36,100

Average Investment(380000+0)/2

=

$     190,000

1a
		Warehouse
Average Rate of return	=	Net Income	/	Average Investment
Average Rate of return	=	$       36,100	/	$                       190,000
Average Rate of return	=	19%
		Tracking Technology
Average Rate of return	=	Net Income	/	Average Investment
Average Rate of return	=	$       36,100	/	$                       190,000
Average Rate of return	=	19%

1b
	Warehouse	Tracking Technology
Present value of net cash flow	$        435,850	$                       460,662
Less: Amount to be Invested	$        380,000	$                       380,000
Net Present Value	$          55,850	$                          80,662

Calculation of PV of Cashflow
		Warehouse		Tracking Technology
Year	PV Factor	Cashflow	Present Value	Cashflow	Present Value
1	0.909	$        115,000	$          104,535	$        184,000	$          167,256
2	0.826	$        115,000	$            94,990	$        155,000	$          128,030
3	0.751	$        115,000	$            86,365	$        109,000	$            81,859
4	0.683	$        115,000	$            78,545	$          75,000	$            51,225
5	0.621	$        115,000	$            71,415	$          52,000	$            32,292
Total			$          435,850		$          460,662

If only one of the two project can be accepted, Tracking Technology project will be accepted as it gives more NPV.

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