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:

YearRobotic Assembler

Operating IncomeRobotic Assembler

Net Cash FlowWarehouse

Operating IncomeWarehouse

Net Cash Flow$1$$$60,900$$$188,000$$$128,000$$$301,000260,900188,00097,000254,000360,900188,00049,000179,000460,900188,00021,000122,000560,900188,0009,50084,000$Total$$304,500$$$940,000$$$304,500$$$940,000$

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 InterestYear$6\%10\%12\%15\%20\%10\mathrm{.}9430\mathrm{.}9090\mathrm{.}8930\mathrm{.}8700\mathrm{.}83320\mathrm{.}8900\mathrm{.}8260\mathrm{.}7970\mathrm{.}7560\mathrm{.}69430\mathrm{.}8400\mathrm{.}7510\mathrm{.}7120\mathrm{.}6580\mathrm{.}57940\mathrm{.}7920\mathrm{.}6830\mathrm{.}6360\mathrm{.}5720\mathrm{.}48250\mathrm{.}7470\mathrm{.}6210\mathrm{.}5670\mathrm{.}4970\mathrm{.}40260\mathrm{.}7050\mathrm{.}5640\mathrm{.}5070\mathrm{.}4320\mathrm{.}33570\mathrm{.}6650\mathrm{.}5130\mathrm{.}4520\mathrm{.}3760\mathrm{.}27980\mathrm{.}6270\mathrm{.}4670\mathrm{.}4040\mathrm{.}3270\mathrm{.}23390\mathrm{.}5920\mathrm{.}4240\mathrm{.}3610\mathrm{.}2840\mathrm{.}194100\mathrm{.}5580\mathrm{.}3860\mathrm{.}3220\mathrm{.}2470\mathrm{.}162$

Required:

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

Investment CommitteeAverage Rate of ReturnRobotic 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 DescriptionRobotic AssemblerWarehousePresent value of net cash flow$fill in the blank $3$$fill in the blank $4$Amount to be investedfill in the blank $5$fill in the blank $6$Net present value$fill in the blank $7$$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 $3$

smallerlarger

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

earlierlater

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

robotic assemblerwarehouse

would be the more attractive.