Question

1. 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	$ 61,400		$135,000			$ 34,400		$108,000
   2	51,400		125,000			34,400		108,000
   3	36,400		110,000			34,400		108,000
   4	26,400		100,000			34,400		108,000
   5	(3,600)		70,000			34,400		108,000
   Total	$172,000		$540,000			$172,000		$540,000

   Each project requires an investment of $368,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% 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. If required, round to the nearest dollar.

   	Warehouse	Tracking Technology
   Present value of net cash flow total	$	$
   Amount to be invested	$	$
   Net present value	$	$

   2. The

   • warehouse
   • tracking technology
   net present value exceeds the selected rate established for discounted cash flows (15%), while the
   • warehouse
   • tracking technology
   does not. Thus, considering only quantitative factors, the
   • warehouse
   • tracking technology
   investment should be selected.

Answer 1

Answer to Requirement 1a:

Warehouse:

Average Income from Operations = $172,000 / 5
Average Income from Operations = $34,400

Average Rate of Return = Average Income from Operations / Amount to be Invested
Average Rate of Return = $34,400 / $368,000
Average Rate of Return = 9.3%

Tracking Technology:

Average Income from Operations = $172,000 / 5
Average Income from Operations = $34,400

Average Rate of Return = Average Income from Operations / Amount to be Invested
Average Rate of Return = $34,400 / $368,000
Average Rate of Return = 9.3%

Answer to Requirement 1b:

Warehouse:

Present Value of Net Cash Flows = $135,000 * PV of $1 (15%, 1) + $125,000 * PV of $1 (15%, 2) + $110,000 * PV of $1 (15%, 3) + $100,000 * PV of $1 (15%, 4) + $70,000 * PV of $1 (15%, 5)
Present Value of Net Cash Flows = $135,000 * 0.870 + $125,000 * 0.756 + $110,000 * 0.658 + $100,000 * 0.572 + $70,000 * 0.497
Present Value of Net Cash Flows = $376,320

NPV = Present Value of Net Cash Flows - Amount to be Invested
NPV = $376,320 - $368,000
NPV = $8,320

Tracking Technology:

Present Value of Net Cash Flows = $108,000 * PV of $1 (15%, 1) + $108,000 * PV of $1 (15%, 2) + $108,000 * PV of $1 (15%, 3) + $108,000 * PV of $1 (15%, 4) + $108,000 * PV of $1 (15%, 5)
Present Value of Net Cash Flows = $108,000 * 0.870 + $108,000 * 0.756 + $108,000 * 0.658 + $108,000 * 0.572 + $108,000 * 0.497
Present Value of Net Cash Flows = $362,124

NPV = Present Value of Net Cash Flows - Amount to be Invested
NPV = $362,124 - $368,000
NPV = -$5,876

Answer 2.

The warehouse net present value exceeds the selected rate established for discounted cash flows (15%), while the tracking technology does not. Thus, considering only quantitative factors, the warehouse investment should be selected.