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Average Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of...

Average Rate of Return Method, Net Present Value Method, and Analysis

The capital investment committee of Overnight Express Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:

Distribution Center Expansion Internet Tracking Technology
Year Income from
Operations
Net
Cash Flow
Income from
Operations
Net
Cash Flow
1 $ 66,000 $ 226,000 $200,000 $ 360,000
2 66,000 226,000 90,000 250,000
3 66,000 226,000 30,000 190,000
4 66,000 226,000 10,000 170,000
5 66,000 226,000 0 160,000
Total $330,000 $1,130,000 $330,000 $1,130,000
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

Each project requires an investment of $800,000. 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.

Required:

1a. Compute the average rate of return for each investment. Round to one decimal place.

Average Annual Rate of Return
Distribution Center Expansion %
Internet 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.

Distribution Center Expansion Internet Tracking Technology
Present value of net cash flow total $ $
Amount to be invested
Net present value $ $

Solutions

Expert Solution

Average annual net income 66000 =330000/5
Average Investment 400000 =800000/2
1a
Average Annual Rate of Return
Distribution Center Expansion 16.5% =66000/400000
Internet Tracking Technology 16.5% =66000/400000
1b
Distribution Center Expansion Internet Tracking Technology
Present value of net cash flow total 757778 803980
Amount to be invested 800000 800000
Net present value -42222 3980
Workings:
Distribution Center Expansion Internet Tracking Technology
Cash flows PV factor 15% Present value Cash flows PV factor 15% Present value
1 226000 0.870 196620 360000 0.870 313200
2 226000 0.756 170856 250000 0.756 189000
3 226000 0.658 148708 190000 0.658 125020
4 226000 0.572 129272 170000 0.572 97240
5 226000 0.497 112322 160000 0.497 79520
Total 757778 Total 803980

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