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	$37,800		$120,000			$79,000		$192,000
   2	37,800		120,000			60,000		162,000
   3	37,800		120,000			30,000		114,000
   4	37,800		120,000			13,000		78,000
   5	37,800		120,000			7,000		54,000
   Total	$189,000		$600,000			$189,000		$600,000

   Each project requires an investment of $360,000. 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

   • larger
   • smaller
   net present value as tracking technology cash flows occur
   • earlier
   • more evenly
   • later
   in time. Thus, if only one of the two projects can be accepted, the
   • tracking technology
   • warehouse
   would be the more attractive.

Answer 1

Average Annual net income	37800	=189000/5
Average Investment	180000	=360000/2
1a
	Average Rate of Return
Warehouse	21%	=37800/180000
Tracking Technology	21%	=37800/180000
1b
	Warehouse	Tracking Technology
Present value of net cash flow total	454800	480762
Less amount to be invested	360000	360000
Net present value	94800	120762
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	Present value	Cash flows	PV factor	Present value
1	120000	0.909	109080	192000	0.909	174528
2	120000	0.826	99120	162000	0.826	133812
3	120000	0.751	90120	114000	0.751	85614
4	120000	0.683	81960	78000	0.683	53274
5	120000	0.621	74520	54000	0.621	33534
		Total	454800		Total	480762