Average Rate of Return Method, Net Present Value Method, and analysis for a Service Company

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 TechnologyYearIncome from Operations Net Cash FlowIncome from Operations Net Cash Flow1$ 61,400 $135,000 $ 34,400 $108,0002 51,400 125,000 34,400 108,0003 36,400 110,000 34,400 108,0004 26,400 100,000 34,400 108,0005 (3,600) 70,000 34,400 108,000Total$172,000$540,000$172,000$540,000

Each project requires an investment of $368,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis.

Present Value of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83320.8900.8260.7970.7560.69430.8400.7510.7120.6580.57940.7920.6830.6360.5720.48250.7470.6210.5670.4970.40260.7050.5640.5070.4320.33570.6650.5130.4520.3760.27980.6270.4670.4040.3270.23390.5920.4240.3610.2840.194100.5580.3860.3220.2470.162

Required:

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

Average Rate of ReturnWarehousefill in the blank 1%Tracking Technologyfill in the blank 2%

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. If required, round to the nearest dollar.

WarehouseTracking TechnologyPresent value of net cash flow total$fill in the blank 3$fill in the blank 4Less amount to be invested$fill in the blank 5$fill in the blank 6Net present value$fill in the blank 7$fill in the blank 8

2. The .. net present value exceeds the selected rate established for discounted cash flows (15%), while the..does not. Thus, considering only quantitative factors, the ..investment should be selected.