Question

Average rates of Return Method, Net Present Value Method, and And The capital investment committee of Ellis Transport and Storage Inc. is considering two The estimated income from operations and net cash flows from each investment are as follows: Tracking Technology Year Income from Net Cash $251.000 wNw Warehouse Income from Net Cash Operations Flow $52,200 $157,000 52,200 157,000 52,200 157,000 52,200 157,000 52,200 157,000 $261,000 $785,000 34,000 212.000 149.00 42,000 18,000 7.000 Total 61,000 $785,000 Each project requires an investment of $580,000. 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 Interes Year 6% 10% 129 15% 20% 0.943 0.909 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.6210.567 0.497 0.402 0.705 0.564 0.507 0.432 0.665 0.513 0.452 0.376 0.627 0.467 0.404 0.327 0.592 0.424 0.361 0.284 0.194 0.558 0.386 0.322 0.247 0.162 ON oooo 10 Required: la. 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 1h 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 in time. Thus, if only one of the two projects can be accepted, the net present value as tracking technology cash flows occur would be the more attractive. 2. The warehouse has a

Answer 1

1a. Computation of Average Rate of Return

Average Rate of Return = (Total Cash inflow over the life of investment/Number of years of life of investment)*1/Initial Investment

Ware House = {( $157,000+ $157,000+$157,000+$157,000+$157,000) / 5} * 1 / $580,000

= ($785,000 / 5) * 1/$580,000

= $157,000 * 1 / $580,000

= 0.2706 or 27.06%

= 27% (rounded of)

Tracking Technology = {($251,000+$212,000+$149,000+$102,000+$71,000) / 5} * 1 / $580,000

= ($785,000 / 5) * 1/$580,000

= $157,000 * 1 / $580,000

= 0.2706 or 27.06%

   = 27% (rounded of)

	Average Rate of Return
Ware House	27%
Tracking Technology	27%

1b. Net Present Value Of Investments

Net Present Value = Present of total Cash Inflows - Present value of total cash outflows

Ware House

Present Value of total Cash inflows

	Cash Inflow	Present Value Factor	Present Value of Cash Inflow
Year 1	$157,000	0.909	$142,713
Year 2	$157,000	0.826	$129,682
Year 3	$157,000	0.751	$117,907
Year 4	$157,000	0.683	$107,231
Year 5	$157,000	0.621	$97,497
			$595,030

Present Value of Cash Outflows = $580,000

Net Present Value (NPV) = Present of total Cash Inflows - Present value of total cash outflows

   = $595,030 - $580,000

    NPV = $15,030

Tracking Technology

Present Value of total Cash inflows

	Cash Infow	Present Value Factor	Present Value of Cash Inflow
Year 1	$251,000	0.909	$228,159
Year 2	$212,000	0.826	$175,112
Year 3	$149,000	0.751	$111,899
Year 4	$102,000	0.683	$69,666
Year 5	$71,000	0.621	$44,091
			$628,927

  

Present Value of Cash Outflows = $580,000

Net Present Value (NPV) = Present of total Cash Inflows - Present value of total cash outflows

= $628,957 - $580,000

NPV   = $48,927

	Ware House	Tracking Technology
Present of Net Cash flow Total	$595,030	$628,927
Less: Amount to be Invested	$580,000	$580,000
Net Present Value	$15,030	$48,927

  

2. The Warehouse has a $15,030 Net Present Value as tracking technology cash flows occur $48,927 in time, if only one of the two projects can be accepted , the Tracking Technology would be the more attractive.