Question

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he 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	$44,000		$137,000			$92,000		$219,000
2	44,000		137,000			70,000		185,000
3	44,000		137,000			35,000		130,000
4	44,000		137,000			15,000		89,000
5	44,000		137,000			8,000		62,000
Total	$220,000		$685,000			$220,000		$685,000

Each project requires an investment of $440,000. 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

Average Annual net income	44000	=220000/5
Average Investment	220000	=440000/2
1a
	Average Rate of Return
Warehouse	20%	=44000/220000
Tracking Technology	20%	=44000/220000
1b
	Warehouse	Tracking Technology
Present value of net cash flow total	519230	548800
Less amount to be invested	440000	440000
Net present value	79230	108800
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	137000	0.909	124533	219000	0.909	199071
2	137000	0.826	113162	185000	0.826	152810
3	137000	0.751	102887	130000	0.751	97630
4	137000	0.683	93571	89000	0.683	60787
5	137000	0.621	85077	62000	0.621	38502
		Total	519230		Total	548800