Question

1. 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	$42,500		$139,000			$89,000		$222,000
   2	42,500		139,000			68,000		188,000
   3	42,500		139,000			34,000		132,000
   4	42,500		139,000			15,000		90,000
   5	42,500		139,000			6,500		63,000
   Total	$212,500		$695,000			$212,500		$695,000

   Each project requires an investment of $500,000. 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

1a
Average net income	42500	=212500/5
Average investment	250000	=500000/2
	Average Rate of Return
Warehouse	17%	=42500/250000
Tracking Technology	17%	=42500/250000
1b
	Warehouse	Tracking Technology
Present value of net cash flow total	526810	556811
Less amount to be invested	500000	500000
Net present value	26810	56811
2
The warehouse has a less 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:
	Net cash flow	PV factor	Present value
1	139000	0.909	126351
2	139000	0.826	114814
3	139000	0.751	104389
4	139000	0.683	94937
5	139000	0.621	86319
		Total	526810
Tracking Technology:
	Net cash flow	PV factor	Present value
1	222000	0.909	201798
2	188000	0.826	155288
3	132000	0.751	99132
4	90000	0.683	61470
5	63000	0.621	39123
		Total	556811