Average rate of return method, net present value method, and analysis for a service company

The capital investment committee of Iguana Inc. is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows:

Year Robotic Assembler

Operating Income Robotic Assembler

Net Cash Flow Warehouse

Operating Income Warehouse

Net Cash Flow

$1$ $$42,000$ $$137,000$ $$88,000$ $$219,000$

$242,000137,00067,000185,000$

$342,000137,00034,000130,000$

$442,000137,00015,00089,000$

$542,000137,0006,00062,000$

Total $$210,000$ $$685,000$ $$210,000$ $$685,000$

Each project requires an investment of $$420,000.$ 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 $6\%10\%12\%15\%20\%$

$10\mathrm{.}9430\mathrm{.}9090\mathrm{.}8930\mathrm{.}8700\mathrm{.}833$

$20\mathrm{.}8900\mathrm{.}8260\mathrm{.}7970\mathrm{.}7560\mathrm{.}694$

$30\mathrm{.}8400\mathrm{.}7510\mathrm{.}7120\mathrm{.}6580\mathrm{.}579$

$40\mathrm{.}7920\mathrm{.}6830\mathrm{.}6360\mathrm{.}5720\mathrm{.}482$

$50\mathrm{.}7470\mathrm{.}6210\mathrm{.}5670\mathrm{.}4970\mathrm{.}402$

$60\mathrm{.}7050\mathrm{.}5640\mathrm{.}5070\mathrm{.}4320\mathrm{.}335$

$70\mathrm{.}6650\mathrm{.}5130\mathrm{.}4520\mathrm{.}3760\mathrm{.}279$

$80\mathrm{.}6270\mathrm{.}4670\mathrm{.}4040\mathrm{.}3270\mathrm{.}233$

$90\mathrm{.}5920\mathrm{.}4240\mathrm{.}3610\mathrm{.}2840\mathrm{.}194$

$100\mathrm{.}5580\mathrm{.}3860\mathrm{.}3220\mathrm{.}2470\mathrm{.}162$

Required:

$1$a$.$ Compute the average rate of return for each investment. If required, round your answer to one decimal place.

Investment Committee Average Rate of Return

Robotic Assembler

$\%$

Warehouse

$\%$

$1$b$.$ Compute the net present value for each investment. Use the present value of $$1$ table above. If required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.

Line Item Description Robotic Assembler Warehouse

Present value of net cash flow $fill in the blank $3$

$fill in the blank $4$

Amount to be invested fill in the blank $5$

fill in the blank $6$

Net present value $fill in the blank $7$

$fill in the blank $8$

$2.$ Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.

The robotic assembler has a fill in the blank $1$ of $3$

smaller

net present value because cash flows occur fill in the blank $2$ of $3$

later

in time compared to the warehouse. Thus, if only one of the two projects can be accepted, the fill in the blank $31$ of $3$

warehouse

would be the more attractive.

Feedback Area

Feedback

$1$a$.$ Divide the estimated average annual income by the average investment.

$1$b$.$ For each investment, multiply the present value factor for each year $($Refer to Exhibit $2$ in the text$)$ by that year's net cash flow. Subtract the amount to be invested from the total present value of the net cash flow. Which investment offers the more favorable net present value?

$2.$ Consider when cash flows are received and the time value of money.