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 $47,500 $147,000 $100,000 $235,000 2 47,500 147,000 76,000 198,000 3 47,500 147,000 38,000 140,000 4 47,500 147,000 17,000 96,000 5 47,500 147,000 6,500 66,000 Total $237,500 $735,000 $237,500 $735,000 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 12% 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

1)

AVerage Income = 237500/5 = 47500

Average investment = 500000/ 2 = 250000

Average rate of return :

Warehouse = Average income /Average investment

                 = 47500 / 250000

                = .19 or 19%

Tracking Technology = 19 %          [since the overall income from operation and investment is same]

2)

		Warehouse			Tracking Technology
yEar	cash flow	PVF @12%`	Cash flow *PVF	Cash flow	PVF @ 12%	Cash flow *PVF
1	147000	.893	131271	235000	.893	209855
2	147000	.797	117159	198000	.797	157806
3	147000	.711	104517	140000	.711	99540
4	147000	.636	93492	96000	.636	61056
5	147000	.567	83349	66000	.567	37422
	Total present value		529788			565679
	LESS:iNITIAL investment		(500000)			(500000)
	NPV		29788			65679

2)SInce NPV of tracking technology is higher ,it is preferable