The capital investment committee of Ellis Transport and Storage Inc. is consider

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.

Explanation / Answer

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)

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

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

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