The capital investment committee of Ellis Transport and Stor

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 $57,000 $185,000 $120,000 $296,000 2 57,000 185,000 91,000 250,000 3 57,000 185,000 46,000 176,000 4 57,000 185,000 20,000 120,000 5 57,000 185,000 8,000 83,000 Total $285,000 $925,000 $285,000 $925,000 Each project requires an investment of $600,000. 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.

Solution

1) Average rate of return on investment = Average net income*100/Average investment

Warehouse = 57000*100/300000 = 19%

Tracking technology = 57000*100/300000 = 19%

1b) Net present value = Present value of cash inflow-Present value of cash outflow

Warehouse = (185000*3.605)-600000 = 66925

Tracking technology = (296000*.893+250000*.797+176000*.712+120000*.636+83000*.567)-600000 = 112271

2) Tracking technology can be accepted