Show Me How The capital Investment committee of Ells Transpo

Show Me How The capital Investment committee of Ells Transport and Storage Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows Tracking Technology Net Income from Income from Cash s61,400 135,000 125,000 110,000 s 34,400 6,400 3,600) $172,000 4,400 1OR,DOO $540,000 $172,000 Each project requires an investment of $368,000 Straight-ine depreciation will be used, and no residual value is expected. The committee has seeded a rate of 15% \"or purposes of the net present value ralysis. Present Value of 51 at Compound Interest Year 6% 10% 12% 15% 20% .8400.7510.712 0.658 0.579 0.7920683 0.636 572 0.482 8

Solution

Answer 1-a.

Warehouse:

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

Average Investment = $368,000 / 2
Average Investment = $184,000

Average Rate of Return = Average Income from Operations / Average Investment
Average Rate of Return = $34,400 / $184,000
Average Rate of Return = 18.70%

Tracking Technology:

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

Average Investment = $368,000 / 2
Average Investment = $184,000

Average Rate of Return = Average Income from Operations / Average Investment
Average Rate of Return = $34,400 / $184,000
Average Rate of Return = 18.70%

Answer 1-b.

Warehouse:

Present Value of Net Cash Flow Total = $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 Flow Total = $135,000*0.870 + $125,000*0.759 + $110,000*0.658 + $100,000*0.572 + $70,000*0.497
Present Value of Net Cash Flow Total = $376,695

Net Present Value = Present Value of Net Cash Flow Total - Amount to be Invested
Net Present Value = $376,695 - $368,000
Net Present Value = $8,695

Tracking Technology:

Present Value of Net Cash Flow Total = $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 Flow Total = $108,000*0.870 + $108,000*0.759 + $108,000*0.658 + $108,000*0.572 + $108,000*0.497
Present Value of Net Cash Flow Total = $362,448

Net Present Value = Present Value of Net Cash Flow Total - Amount to be Invested
Net Present Value = $362,448 - $368,000
Net Present Value = -$5,552

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.